Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Form S-1 Prestwick Pharmaceuticals, Inc. HTML 1.18M
2: EX-3.1 Form of Amended and Restated Certificate of HTML 24K
Incorporation
3: EX-3.2 Amended and Restated Bylaws HTML 128K
4: EX-4.2 Amended and Restated Investor Rights Agreement HTML 190K
9: EX-10.10 Amended and Restated Agreement -- Cambridge HTML 187K
Laboratories
10: EX-10.11 Agreement Dated February 2, 2004 HTML 51K
11: EX-10.12 Development and Commercialization License and HTML 268K
Clinical Supply Agreement
12: EX-10.13 License Agreement -- Dr. Maurice W. Gittos HTML 78K
13: EX-10.14 License Agreement -- the General Hospital HTML 75K
Corporation
14: EX-10.15 Letter Agreement -- Melvin D. Booth HTML 29K
15: EX-10.16 Letter Agreement -- David A. Cory HTML 25K
16: EX-10.17 Letter Agreement -- Christopher F. O'Brien HTML 25K
17: EX-10.18 Letter Agreement -- James P. Shaffer HTML 23K
18: EX-10.19 Letter Agreement -- William H Washecka HTML 22K
19: EX-10.20 Letter Agreement -- Benjamin P. Lewis HTML 18K
20: EX-10.21 Separation Agreement -- Robert S. Whitehead HTML 65K
21: EX-10.22 Letter Agreement -- Mark Van Ausdal HTML 66K
5: EX-10.5 Form of Indemnification Agreement HTML 72K
6: EX-10.6 Asset Purchase and Subscription Agreement HTML 188K
7: EX-10.7 Executive Employment Agreement - Kathleen HTML 54K
Clarence-Smith, M.D., Ph.D.
8: EX-10.9 Agreement for Canadian Rights to Nitoman HTML 204K
22: EX-21.1 Subsidiaries of the Registrant HTML 8K
23: EX-23.2 Consent of Experts or Counsel HTML 9K
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Michael R. Lincoln, Esq.
Aaron J. Velli, Esq.
Darren K. DeStefano, Esq.
Brian F. Leaf, Esq.
Cooley Godward LLP
One Freedom Square, Reston Town Center
11951 Freedom Drive Reston, VA20190-5656
Tel: (703) 456-8000
Fax: (703) 456-8100
Jeffrey S. Marcus, Esq.
Michael G. Kalish, Esq.
Morrison & Foerster LLP
1290 Avenue of the Americas New York, New York10104-0050
Tel: (212) 468-8000
Fax: (212) 468-7900
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Aggregate Offering
Amount of
Title of Securities to be Registered
Price(1)(2)
Registration Fee
Common Stock, $0.001 par value
$74,750,000
$8,798.08
(1)
Includes shares that the underwriters have the option to
purchase solely to cover over-allotments, if any.
(2)
Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(o).
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
in this preliminary prospectus is not complete and may be
changed. We may not sell these shares until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
This is the initial public offering of our common stock. No
public market currently exists for our common stock. We are
offering all of
the shares
of common stock offered by this prospectus. We expect the public
offering price to be between
$ and
$ per
share.
We intend to apply to have our common stock approved for
quotation on The Nasdaq National Market under the symbol
“PWCK.”
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock
under “Risk factors” beginning on page 8 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public offering price
$
$
Underwriting discounts and commissions
$
$
Proceeds, before expenses, to us
$
$
The underwriters may also purchase up to an
additional shares
of our common stock from us at the public offering price, less
underwriting discounts and commissions payable by us, to cover
over-allotments, if any, within 30 days from the date of
this prospectus. If the underwriters exercise this option in
full, the total underwriting discounts and commissions will be
$ ,
and total proceeds, before expenses, will be
$ .
The underwriters are offering the common stock as set forth
under “Underwriting.” Delivery of the shares will be
made on or
about ,
2005.
UBS Investment Bank
Deutsche Bank Securities
CIBC World Markets
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with additional information or
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where those offers and sales
are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
Management’s discussion and analysis of financial condition
and results of operations
49
Business
61
Management
104
Principal stockholders
122
Certain relationships and related party transactions
126
Shares eligible for future sale
130
United States federal tax considerations for
non-U.S. holders
133
Description of capital stock
136
Underwriting
140
Legal matters
143
Experts
143
Where you can find more information
144
Index to consolidated financial statements
F-1
We own an application for federal registration in the trademark
of the combination of Prestwick Pharmaceuticals and the
Prestwick Pharmaceuticals logo, and we have been licensed rights
to use the service marks and trademarks for Nitoman® and
Xenazine® in the United States and Canada. All other
trademarks or tradenames referred to in this prospectus are the
property of their respective owners.
Through and
including ,
2005, federal securities law requires all dealers that effect
transactions in our common stock, whether or not participating
in this offering, to deliver a prospectus. This requirement is
in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Prospectus summary
This summary highlights selected information appearing
elsewhere in this prospectus. While this summary highlights what
we consider to be the most important information about us, you
should carefully read this prospectus and the registration
statement of which this prospectus is a part in their entirety
before investing in our common stock, especially the risks of
investing in our common stock, which we discuss under “Risk
factors,” and our consolidated financial statements and
related notes beginning on page F-1.
Unless the context requires otherwise, in this prospectus,
the words “Prestwick,”“we,”“Company,”“us” and “our” refer to
Prestwick Pharmaceuticals, Inc., and its wholly owned
subsidiary, Prestwick Pharmaceuticals Canada, Inc.
OVERVIEW
We are a product-focused specialty pharmaceutical company
engaged in the development and commercialization of small
molecule drugs with high commercial potential and relatively low
development risk that target chronic diseases of the central
nervous system, or CNS. Our strategy is to identify, acquire,
develop and commercialize product candidates that address CNS
disorders with significant unmet medical need. We also intend to
develop and market both new and enhanced delivery forms and
additional therapeutic applications of some of our product
candidates to increase their commercial potential. To date, we
have in-licensed rights relating to five product candidates, one
of which, tetrabenazine, we currently market in Canada and
expect to receive approval to market in the United States. Based
on our fast track designation, we could receive FDA approval to
market tetrabenazine in the United States as early as the first
quarter of 2006.
Our current product portfolio consists of the following five
product candidates:
--
Tetrabenazine.
Tetrabenazine is a
highly selective and reversible dopamine depletor that we market
under the brand name Nitoman in Canada and that is marketed as
Xenazine in Europe by Cambridge Laboratories Limited, or
Cambridge. Tetrabenazine, the only product ever approved for the
treatment of hyperkinetic movement disorders, is approved for
marketing in eight countries and is currently under regulatory
review for approval in several additional countries. In the
United States there is currently no FDA-approved treatment for
this broad group of movement disorders, which are characterized
by abnormal and involuntary movements. We acquired exclusive
rights to develop and commercialize tetrabenazine in the United
States from Cambridge, which has also granted us the exclusive
rights to import, distribute and market Nitoman tablets in
Canada. We have completed Phase III pivotal trials in the
United States for the use of tetrabenazine as a treatment for
chorea associated with Huntington’s disease. In September
2004, we re-launched Nitoman in Canada, where it is approved for
broad use in the treatment of hyperkinetic movement disorders.
We also expect to submit a New Drug Application, or NDA, to the
FDA in the second quarter of 2005 for the indication of chorea
associated with Huntington’s disease. The FDA has granted
tetrabenazine orphan drug designations for Huntington’s
disease and for moderate to severe tardive dyskinesia, another
movement disorder. The FDA has also granted tetrabenazine fast
track designation for chorea associated with Huntington’s
disease.
--
Lisuride.
Lisuride is a highly
potent dopamine agonist currently available in Europe as an oral
therapy for the treatment of Parkinson’s disease, a
progressive and degenerative neurological disorder that causes
loss of control over body movements. Parkinson’s disease
results from the degeneration of a small group of nerve cells in
the brain that produce dopamine, a neurotransmitter involved in
motor function and movement. Lisuride acts to mimic
dopamine’s function in the brain by stimulating dopamine
receptors. Several European regulatory authorities have
determined that the oral form of lisuride is safe and
efficacious in Parkinson’s disease. As an oral treatment,
however, lisuride has achieved only limited commercial success
due to a short half-life and highly variable absorption. In
September 2003, we in-licensed from NeuroBiotec GmbH
1
exclusive rights to develop and commercialize certain lisuride
formulations for transdermal, subcutaneous, intravenous and
other non-oral sustained release delivery in the United States
and Canada. Patients with Parkinson’s disease need
continuous, stable stimulation of dopamine receptors, which is
best obtained through patches or subcutaneous infusion, but no
current FDA-approved therapy provides this. We believe that the
kinetic and chemical characteristics of lisuride make it
amenable for this type of delivery. These characteristics
include high potency, short half-life, adequate solubility,
favorable dermal absorption profile and good local tolerability,
which we believe should make it well-suited for subcutaneous
infusion and transdermal delivery. In our opinion, these
formulations can overcome some of the key limitations of
currently prescribed therapies, such as fluctuating blood levels
of dopamine agonists that cause discomfort and disability and
may hasten the onset of motor response complications. We believe
that continuous stimulation of the dopaminergic receptors is
important for the treatment of the symptoms associated with
Parkinson’s disease and is not achieved with current
therapies. In collaboration with NeuroBiotec, we are currently
conducting clinical trials in Europe to evaluate the safety and
efficacy of our two lisuride product candidates: Lisuride
Subcutaneous and Lisuride Transdermal.
--
Lisuride
Subcutaneous. Lisuride
Subcutaneous is under development to be administered by an
external pump that infuses lisuride under the skin to deliver
continuous, stable levels of dopaminergic stimulation to treat
advanced Parkinson’s disease. Clinical trials and
compassionate use in over 450 patients in Europe have
suggested that this method of lisuride delivery may be safe and
effective in reducing the severity of symptoms associated with
advanced Parkinson’s disease, prior to or as an alternative
to brain surgery or deep brain stimulation. Our collaborator,
NeuroBiotec, has initiated a Phase III clinical trial in
Europe utilizing Lisuride Subcutaneous for advanced
Parkinson’s disease, and we expect to receive data from
this trial during the fourth quarter of 2006. We intend to use
the safety and efficacy results of these European trials as
supportive data for our regulatory submissions of Lisuride
Subcutaneous for approval in the United States and Canada. We
expect to submit an Investigational New Drug application, or
IND, in the second half of 2005 and to begin Phase III
clinical trials in the United States in early 2006. We also plan
to seek orphan drug and fast track designations from the FDA for
Lisuride Subcutaneous as a treatment for advanced
Parkinson’s disease.
--
Lisuride
Transdermal. Lisuride
Transdermal is under development as a weekly patch placed on the
skin that is intended to conveniently deliver continuous, stable
levels of dopaminergic stimulation for up to seven days.
NeuroBiotec has completed Phase I and Phase II
clinical trials in Europe and has completed enrollment of a
Phase II/III trial in 331 patients using Lisuride
Transdermal as a treatment for Parkinson’s disease. In
addition to studying lisuride as a treatment for
Parkinson’s disease, NeuroBiotec has completed a pilot
study suggesting that Lisuride Transdermal may also be an
effective and convenient therapy to control the symptoms of
Restless Legs Syndrome, another movement disorder characterized
by an overwhelming urge to move the legs. NeuroBiotec has also
recently completed a Phase II/III clinical trial in Europe
for Restless Legs Syndrome in 240 patients, and we expect
to receive results from this trial in the second half of 2005.
We have conducted three Phase I trials in Europe and expect
to submit an IND to the FDA in the second half of 2005 and to
initiate Phase III clinical trials in the United States in
early 2006.
--
D-Serine.
D-Serine is an oral,
selective amino acid co-agonist that, along with another amino
acid, glycine, stimulates the activation of the
N-methyl-D-aspartic acid, or NMDA, receptor in the brain. The
NMDA receptor plays a critical role in brain development and
memory, is important in brain function and has been suggested to
facilitate mental focus. We are developing D-Serine for the
treatment of schizophrenia, a chronic, severe and disabling CNS
disorder. Studies have demonstrated that blood levels of
D-Serine in patients with schizophrenia are significantly lower
than those in persons without schizophrenia. Multiple
physician-sponsored Phase IIa trials
2
conducted outside the United States have suggested that
D-Serine, as an adjunct to current therapies, can lead to
significant improvements in multiple symptoms of schizophrenia
patients when compared to current therapies alone. We believe
that D-Serine, if approved by the FDA as an adjunct therapy, may
also potentially be developed as a monotherapy for patients with
schizophrenia. We acquired worldwide development and
commercialization rights to D-Serine for its use in a number of
neurological indications, including schizophrenia, autism and
Alzheimer’s disease, from Massachusetts General Hospital
and Glytech, Inc. We expect to initiate our United States
clinical development program with a Phase I clinical trial
following the submission of an IND for D-Serine in late 2005.
Following this trial, we will seek to reproduce the results of
the Phase IIa trials in a broad Phase IIb clinical
trial in the United States in 2006.
--
PPI-03306.
PPI-03306 selectively
modulates a key enzyme involved in the synthesis of serotonin.
Serotonin is a chemical neurotransmitter implicated in the
regulation of sleep cycles. PPI-03306 is a product candidate in
early development for the treatment of sleep apnea, a disorder
characterized by interrupted breathing during sleep. There are
currently no FDA-approved drugs to treat sleep apnea. We have
in-licensed exclusive worldwide rights to develop and
commercialize PPI-03306 for the treatment of sleep apnea as well
as certain other neurological conditions. In one study conducted
outside the United States in patients with anxiety, the active
ingredient in PPI-03306 was observed in one patient to have
beneficial effects in the control of symptoms related to sleep
apnea. We have commenced a development program in Europe to
evaluate whether PPI-03306 is effective for the treatment of
sleep apnea. We expect to release the results of a
placebo-controlled Phase II trial in this program in the
fourth quarter of 2006.
OUR STRATEGY
Our goal is to become the leading specialty pharmaceutical
company serving the CNS market. We plan to achieve this goal
through identifying and in-licensing promising product
candidates that have both high commercial potential and
relatively low development risk. We intend to mitigate our
development risk by targeting drugs that have been well
tolerated in human clinical trials and, preferably, have been
shown to be efficacious in humans. We also seek to develop new
delivery forms of certain product candidates in order to
overcome the limitations of existing treatment options, in an
effort to enhance their commercial opportunity. Our strategy to
achieve our goal includes the following key elements:
--
obtaining United States regulatory
approval for tetrabenazine;
--
continuing to identify and acquire
lower-risk product candidates for CNS disorders with significant
unmet medical need;
--
capitalizing on our management
team’s breadth and depth of experience to build value;
--
focusing our sales and marketing
efforts on a targeted base of high-prescribing medical
professionals and taking advantage of our experience with
specialty pharmacy distribution; and
--
optimizing partnering and
collaboration opportunities.
RISKS
Our business is subject to numerous risks, which are highlighted
in the section entitled “Risk factors” immediately
following this prospectus summary. In particular:
--
FDA approval of tetrabenazine may
be delayed or denied for a number of reasons, including the need
to conduct additional clinical trials.
--
even if our product candidates
achieve our objectives in clinical trials, regulatory
authorities still may not approve them.
3
--
other than for tetrabenazine, we
have not yet filed an IND to conduct clinical trials for any of
our product candidates in the United States, and the FDA may not
permit us to conduct clinical trials for these product
candidates in the United States.
--
tetrabenazine is not protected by
any patents, and the rest of our current product candidates only
have limited patent protection. We may not be able to obtain and
maintain orphan drug or Hatch-Waxman marketing exclusivity for
tetrabenazine and other product candidates, and any marketing
exclusivity, if obtained, would only afford us limited
protection.
--
if we fail to obtain additional
financing, we may be unable to complete the development and
commercialization of our current and future product candidates.
OUR CORPORATE INFORMATION
We were incorporated in Delaware in November 2002 under the name
KCS Pharmaceuticals, Inc. In January 2003, we changed our name
to Prestwick Pharmaceuticals, Inc. Our principal executive
office is located at 1825 K Street NW,
Suite 1475, Washington, DC20006, and our telephone number
is (202) 296-1400. Our website address is
www.prestwickpharma.com. We do not incorporate the
information on our website, or accessible through our website,
into this prospectus, and you should not consider such
information as part of this prospectus.
4
The offering
Common stock we are offering
shares
Common stock to be outstanding after this offering
shares
Use of proceeds after expenses
We estimate that the net proceeds from this offering, after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, will be
$ ,
or
$ if
the underwriters’ over-allotment option is exercised in
full, based upon an assumed initial public offering price of
$ per
share. We expect to use the net proceeds from this offering to
continue the development of our product candidates, fund the
anticipated commercial launch of our lead product candidate,
tetrabenazine, in the United States, in-license rights to future
product candidates, and for working capital and other general
corporate purposes.
Proposed Nasdaq National Market symbol
PWCK
The number of shares of our common stock outstanding immediately
after the closing of this offering is based on
63,342,132 shares of our common stock outstanding as of
March 31, 2005, after giving effect to the conversion of
50,579,299 shares of preferred stock outstanding as of
March 31, 2005 into 50,579,299 shares of our common
stock, which will become effective at the closing of this
offering.
The number of shares of our common stock outstanding immediately
after this offering excludes:
--
9,065,500 shares of our
common stock issuable upon the exercise of stock options
outstanding as of March 31, 2005, with a weighted average
exercise price of $0.28 per share, of which options to
purchase 2,847,257 shares of our common stock were
then exercisable;
--
2,756,492 shares of our
common stock reserved for future grant under our 2003 Equity
Incentive Plan as of March 31, 2005; and
--
1,412,455 shares of our
common stock issuable upon the exercise of outstanding warrants
as of March 31, 2005 with a weighted average exercise price of
$0.04 per share.
Unless specifically stated, the information in this prospectus:
--
assumes that the underwriters do
not exercise their option to purchase up
to additional
shares of our common stock to cover any over-allotments;
--
assumes an initial offering price
of
$ per
share, the midpoint of our estimated initial public offering
price range indicated on the cover of this prospectus; and
--
gives effect to
a -for- reverse
stock split to be effected prior to the completion of this
offering.
5
Summary consolidated financial data
We have derived our consolidated statement of operations data
for the period from November 1, 2002
(inception) through December 31, 2002 and for the
years ended December 31, 2003 and 2004 and our consolidated
balance sheet data as of December 31, 2004 from our audited
consolidated financial statements included elsewhere in this
prospectus. You should read the summary consolidated financial
data set forth below in conjunction with “Management’s
discussion and analysis of financial condition and results of
operations” and with our consolidated financial statements
and related notes included elsewhere in this prospectus.
Accretion of redeemable convertible preferred stock to
redemptive value
—
(816
)
(2,311
)
Net loss attributable to common stockholders
$
(1,543
)
$
(11,359
)
$
(22,352
)
Net loss per common share, basic and diluted:
Historical
$
(4.63
)
$
(1.57
)
$
(2.81
)
Pro forma
(unaudited)(1)
$
—
$
—
$
(0.60
)
Shares used to compute basic and diluted net loss per common
share:
Historical
333,562
7,250,000
7,958,668
Pro forma
(unaudited)(1)
—
—
33,345,465
(1)
The pro forma net loss per common share and the shares used
in computing pro forma net loss per common share reflect the
conversion of all outstanding shares of our redeemable
convertible preferred stock as of January 1, 2004, or the
issuance date, whichever is later. Immediately prior to the
closing of our initial public offering, all of our then
outstanding shares of preferred stock will convert into
50,579,299 shares of common stock.
The pro forma balance sheet data give effect to the automatic
conversion, upon the closing of this offering, of all
50,579,299 shares of our Series A-1, A-2 and B
redeemable convertible preferred stock into
50,579,299 shares of our common stock.
(2)
The pro forma as adjusted balance sheet data further give
effect to the sale
of shares
we are offering pursuant to this prospectus and the receipt of
the estimated net proceeds therefrom.
7
Risk factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below with all
of the other information included in this prospectus before
deciding to invest in our common stock. If any of the following
risks actually occur, they may materially harm our business and
our financial condition and results of operations. In this
event, the market price of our common stock could decline and
you could lose part or all of your investment.
RISKS RELATED TO DEVELOPMENT AND REGULATION OF PRODUCT
CANDIDATES
FDA approval of tetrabenazine may be delayed or denied for a
number of reasons, including the need to conduct additional
clinical trials.
We have stated that, as a result of tetrabenazine’s fast
track designation, we could receive FDA approval to market
tetrabenazine for the treatment of chorea associated with
Huntington’s disease in the United States as early as the
first quarter of 2006. This timeline is based on our expectation
that our NDA, once submitted to the FDA, will receive a priority
review. However, while we believe that our expectation of
priority review is reasonable, we cannot guarantee that the FDA
will afford our NDA priority review. If the FDA elects not to
grant priority review to our NDA, we would unlikely receive FDA
approval on the timetable that we currently expect.
Additionally, even if the FDA affords our NDA priority review,
the FDA may not approve our NDA following its initial review for
many reasons, including a concern over adverse side effects
observed in patients that have received tetrabenazine. The FDA
may require us to provide it with additional safety and efficacy
data prior to its approval of tetrabenazine. Notably, the
results of our second Phase III pivotal trial of
tetrabenazine in 30 patients yielded a p-value of 0.078,
which exceeds the p-value of 0.05, customarily considered to
represent statistical significance. Because most products that
the FDA approves have at least two Phase III pivotal trials
with p-values of less than 0.05, the FDA may require us to
conduct another Phase III pivotal trial before it approves
tetrabenazine for commercialization. We are presently planning
to conduct a third Phase III trial, primarily for marketing
purposes, beginning later in 2005. If the FDA requires us to
conduct an additional pivotal trial prior to approving our NDA,
we would expect to use the results from this trial, when
available, for our NDA. However, our planned Phase III
trial may not produce results that will support approval of our
NDA. Additionally, these events could result in significant
expense for our additional development activities without
corresponding revenues from product sales and could materially
delay FDA approval of tetrabenazine for the treatment of chorea
associated with Huntington’s disease, which would have a
material adverse effect on our results of operations.
Even if our product candidates achieve our objectives in
clinical trials, regulatory authorities still may not approve
them.
The FDA and foreign regulatory agencies may refuse to approve an
application for marketing approval for many reasons. For
example, they may disagree with our interpretations of data from
preclinical studies and clinical trials, or they may conclude
that, even if a trial’s endpoints are met, the data from
the clinical program are insufficient to support approval.
A regulatory agency also may approve a product candidate for
fewer indications than requested or may grant approval subject
to the performance of post-marketing studies for a product
candidate. In addition, regulatory agencies may not approve the
labeling claims that are necessary or desirable for the
successful commercialization of our product candidates. The FDA
or comparable foreign regulatory authorities can delay, limit or
deny approval of a product candidate for many reasons, including:
--
a product candidate may not be
safe or effective;
--
a product candidate’s
benefits may not outweigh its risks;
8
Risk factors
--
the existence of an approved
treatment that has demonstrated greater clinical efficacy than
our product candidate, thereby reducing the medical need for our
product candidate;
--
the FDA or comparable foreign
regulatory authorities may interpret data from preclinical and
clinical testing in different ways than we and our collaborators
interpret them;
--
the FDA or comparable foreign
regulatory authorities may not agree with or approve our
manufacturing processes or facilities or the processes or
facilities of our collaborators; or
--
the FDA or comparable foreign
regulatory authorities may change their approval polices or
adopt new regulations.
If we are unable to identify and acquire rights to new
product candidates, or if the product candidates we do acquire
prove to be unsuccessful, our business may be harmed.
All of our current product candidates have been in-licensed from
third parties and our strategy for expanding our business
includes in-licensing additional product candidates in the
future. There is intense competition among biotechnology and
pharmaceutical companies to acquire or in-license promising
product candidates, and we currently have no agreements to
in-license any new product candidates. If we are unable to
successfully identify and acquire the development and
commercialization rights to additional product candidates, our
ability to grow our business will be adversely affected.
Moreover, we may fail to realize the anticipated benefits of any
product candidate acquisition for a variety of reasons, such as
an acquired product candidate proving to not be safe or
effective in later clinical trials. Acquisition efforts can
consume significant management attention and require substantial
expenditures, which could detract from our other programs. In
addition, we may devote resources to potential acquisitions that
are never completed. If we devote significant resources to new
product candidates that ultimately are not approved for
commercialization, it would have a material adverse effect on
our business.
If we encounter difficulties enrolling subjects in our
clinical trials, or subjects drop out of trials in progress, our
trials could be delayed or otherwise adversely affected.
Clinical trials for our product candidates require that we
identify and enroll a large number of patients with the disorder
under investigation. We may not be able to enroll a sufficient
number of subjects to complete our clinical trials in a timely
manner. Enrollment of subjects is affected by many factors,
including:
--
design of the protocol;
--
the limited size of the patient
population for many of our target indications, particularly with
respect to Lisuride Subcutaneous for the treatment of advanced
Parkinson’s disease and tetrabenazine for the treatment of
tardive dyskinesia and Tourette’s Syndrome;
--
eligibility criteria for the trial
in question;
--
perceived risks and benefits of
the product candidate under study;
--
availability of competing
therapies (whether approved or experimental);
--
willingness of subjects to
discontinue receiving existing treatments in order to
participate in our clinical trials, particularly with respect to
Lisuride Transdermal for the treatment of Parkinson’s
disease;
--
subject referral practices of
physicians; and
--
availability of clinical trial
sites.
9
Risk factors
Furthermore, enrolled subjects may drop out of our clinical
trials, which could impair the validity or statistical
significance of the clinical trials. If we have difficulty
enrolling or retaining a sufficient number of subjects to
conduct and complete our clinical trials as planned, we may need
to delay or terminate ongoing or planned clinical trials, either
of which would have a negative effect on our business. Delays in
enrolling subjects in our clinical trials or the withdrawal of
subjects enrolled in our clinical trials would also adversely
affect our ability to develop and seek approval for our product
candidates, could delay or eliminate our ability to generate
product and royalty revenues, and could impose significant
additional costs on us or our collaborators.
Our clinical trials may not yield results that will enable us
to obtain regulatory approval for our products and could result
in our abandoning development of our product candidates.
Other than tetrabenazine, which is approved for use in Canada
(but not in the United States), and lisuride, which has been
approved in a number of European countries as an oral
formulation for the treatment of Parkinson’s disease, our
current product candidates are in clinical development and have
not yet been submitted for regulatory review by the FDA or any
foreign regulatory agency. We will only receive regulatory
approval to commercialize a product candidate if we can
demonstrate to the satisfaction of the FDA or the applicable
foreign regulatory agency, in well-designed and conducted
clinical trials, that the product candidate is safe and
effective and otherwise meets the appropriate standards required
for approval. Clinical trials are lengthy, complex, and
extremely expensive processes with uncertain results. It will
take us at least several years to complete clinical testing, and
failure can occur at any stage of testing. The number of
clinical trials that will be required varies depending on the
product candidate, the indication being evaluated, the trial
results and the regulations applicable to any particular product
candidate. We do not know whether any of our ongoing or future
clinical trials will demonstrate sufficient safety and efficacy
to obtain the requisite regulatory approvals that will result in
marketable products.
Results obtained in preclinical studies on animals and early
clinical trials on humans may not be predictive of results that
are obtained in later trials with larger and more diverse
patient populations. For example, the unexpected observation, in
a clinical trial for anxiety, that the active ingredient in
PPI-03306 may be effective in the treatment of patients with
sleep apnea may not be reproducible. We may suffer significant
setbacks in advanced clinical trials, such as product candidates
failing to exhibit expected therapeutic results, even after
promising observations or results in earlier studies. Based on
results at any stage of clinical trials, we may be required to
repeat or redesign a trial or abandon development of one or more
of our product candidates. If we fail to adequately demonstrate
the safety and efficacy of our products under development, we
will not be able to obtain the required regulatory approvals to
commercialize our product candidates, and our business and
financial condition will be harmed.
Clinical trials are subject to continuing oversight by
government regulatory authorities and institutional review
boards, or IRBs, and must meet the requirements established by
the FDA or IRB. In addition, clinical trials must follow Good
Clinical Practices and comply with principles of current ethical
standards as established by IRBs for informed consent. Thus, we
may be required to suspend or terminate our clinical trials at
any time.
Administering our product candidates to humans may produce
serious and undesirable side effects. The potential adverse
effects and adverse events associated with product candidates
that target the CNS include, but are not limited to, sedation,
insomnia, depression, low blood pressure, confusion,
hallucinations, seizures, suicide and impaired movement or motor
control. These side effects could interrupt, delay or halt
clinical trials of our product candidates and could result in
the FDA or other regulatory authorities denying approval of our
product candidates for any or all targeted indications.
10
Risk factors
Future toxicology studies may reveal adverse effects of our
product candidates.
The FDA will require additional toxicology studies for
tetrabenazine. Once it reviews our NDA, the FDA may permit us to
perform these studies as part of our Phase IV post-approval
commitments. If, however, the FDA requires one or more of these
toxicology studies to be completed prior to approval of our NDA,
our ability to commercialize tetrabenazine in the United States
would be delayed significantly. Additionally, regardless of
whether we conduct these toxicology studies prior to, or
following expected NDA approval, the results of these studies
may show unanticipated significant adverse effects. Depending on
the nature of these adverse effects, the FDA could require us to
abandon our development efforts for tetrabenazine.
Similarly, we may be required to conduct additional toxicology
studies of lisuride before the FDA will approve it. These
toxicology studies may impose a delay in receiving regulatory
approval or significant adverse effects may be observed in these
studies, which could potentially require us to abandon our
development efforts for lisuride.
While a number of animal toxicology studies have been conducted
on D-Serine, long-term and life-long studies have yet to be
conducted. In some animal species, kidney toxicity has been
observed and these past incidences of kidney toxicity may make
it more difficult for us to have D-Serine approved by the FDA or
other regulatory agencies. Moreover, long-term or life-long
exposure to D-Serine may result in significant adverse effects,
including kidney toxicity. If significant adverse effects are
observed in D-Serine, the FDA may delay approval of, or not
approve, D-Serine for commercialization.
No toxicology studies have yet been conducted on PPI-03306 and
we will be required to conduct a full program of toxicology
studies of PPI-03306 prior to NDA approval. Because of the lack
of preclinical and clinical experience with PPI-03306, we cannot
estimate the likelihood that we will observe toxicity in
connection with these studies on PPI-03306. In particular, we
believe that PPI-03306 may cause QTc prolongation, a
sign of cardiac toxicity, or may result in liver toxicity.
If the FDA grants approval of an NDA for one of our product
candidates conditioned on our conducting one or more additional
toxicology studies on the product candidate, this will likely
have the effect of delaying our anticipated product
commercialization. Undertaking these additional studies would
increase our expected costs in connection with our development
efforts and expose us to the risk that significant adverse
effects could be observed in these studies. Such observations
could result in the FDA refusing to approve our NDA for that
product candidate.
Even if we receive regulatory approval for our product
candidates, we will be subject to ongoing regulatory obligations
and review.
Following regulatory approval of any of our product candidates,
we will be subject to continuing regulatory obligations such as
safety reporting requirements and additional post-marketing
obligations, including regulatory oversight of the promotion and
marketing of our products. We are already subject to these
obligations with respect to Nitoman in Canada and, as part of
the NDA application process for tetrabenazine, we will need to
conduct certain safety studies, including carcinogenicity
studies, which we expect to conduct as Phase IV, or
post-approval, commitments. In addition, we and our contract
manufacturers will be required to adhere to regulations setting
forth current Good Manufacturing Practices, or cGMP. These
regulations cover all aspects of the manufacturing, testing,
quality control and recordkeeping relating to our product
candidates and any products that we may commercialize.
Furthermore, our contract manufacturers must be deemed
acceptable after a pre-approval inspection of manufacturing
facilities by the FDA and foreign authorities before obtaining
marketing approval and will be subject to periodic inspection by
these regulatory authorities. Such inspections may result in
compliance issues that could prevent or delay marketing
approval, or require
11
Risk factors
the expenditure of financial or other resources. If we or our
contract manufacturers fail to comply with applicable regulatory
requirements, we may be subject to warning letters, fines, civil
penalties, injunctions, consent decrees, suspension or
withdrawal of regulatory approvals, operating restrictions and
criminal prosecution, any of which would likely harm our
reputation and results of operations.
If our product candidates are approved by regulatory
authorities, they are likely to be approved only for limited
indications.
Even if we do receive regulatory approval for our product
candidates, the FDA and similar foreign regulatory authorities
may impose limitations on the indicated uses for which our
product candidates may be marketed. The FDA generally approves
products for a particular indication. While certain of our
product candidates, such as tetrabenazine for the treatment of
chorea associated with Huntington’s disease and Lisuride
Subcutaneous for the treatment of advanced Parkinson’s
disease, target limited indications with relatively small
patient populations, others target broader indications with
larger patient populations. An approval for a limited indication
reduces the size of the potential market for these product
candidates, which could have a material adverse effect on our
future results of operations, financial condition and cash flows.
We may not achieve our projected development goals, including
FDA approval of tetrabenazine, in the time frames we announce
and expect.
We will set goals for, and may make public statements regarding,
the expected timing of certain accomplishments, such as the
commencement and completion of clinical trials, anticipated
regulatory submission and approval dates and time of product
launch, which we sometimes refer to as milestones. For example,
we have stated that we intend to submit an NDA for tetrabenazine
to the FDA in the second quarter of 2005 and that we could
receive FDA approval as early as the first quarter of 2006.
However, tetrabenazine may not be approved when we predict, if
at all. The actual timing of these events can vary dramatically
due to a number of factors such as delays or failures in our
clinical trials, the uncertainties inherent in the regulatory
approval process and delays in achieving manufacturing,
marketing or distribution arrangements sufficient to
commercialize our products. There can be no assurance as to
when, if ever, our clinical trials will be completed, that they
will be successfully completed, that we will make regulatory
submissions or receive regulatory approvals as planned or that
we will be able to adhere to our current schedule for the
commercial launch of any of our product candidates if they are
approved. If we fail to achieve one or more of these milestones
as planned, our business will be materially adversely affected
and the price of our shares could decline substantially.
Regulatory approval could be delayed or terminated due to
problems with studies conducted by others, either before or
after we in-licensed the product candidates.
We are developing product candidates that we have in-licensed
from unaffiliated parties. Many of the preclinical studies and
some of the clinical trials of these product candidates were
conducted by other companies before we in-licensed the product
candidates. In some cases, the trials were conducted when
regulatory requirements were different than they are today. We
would incur unanticipated costs and experience delays if we were
required to repeat some or all of the studies or trials. Even if
the previous studies are acceptable to regulatory authorities,
we may have to spend additional time analyzing and presenting
the results of the studies. Problems with the previous studies
could cause our regulatory applications to be delayed or
rejected.
Additionally, from time to time we will jointly develop product
candidates with others and, in many instances, these
collaborators will be responsible for conducting later stage
clinical trials. For example, we have agreed to jointly develop
Lisuride Transdermal with NeuroBiotec and NeuroBiotec is
currently
12
Risk factors
conducting Phase III trials in Europe on this product
candidate. If our collaborators, such as NeuroBiotec, experience
serious adverse events in the clinical trials that they are
conducting on our product candidates, the FDA may not approve
the product candidate for commercialization in the United
States, regardless of the results of our own clinical trials.
Failure of the FDA or foreign regulatory authority to approve a
product candidate as a result of preclinical or clinical trial
difficulties would prevent us from commercializing the product
candidate and would have a material adverse effect on our
results of operations.
Other than for tetrabenazine, we have not yet filed an IND to
conduct clinical trials for any of our product candidates in the
United States, and the FDA may not permit us to conduct clinical
trials for these product candidates in the United States.
We are currently conducting Phase I clinical trials for
lisuride in Europe and have commenced a development program in
Europe to evaluate whether PPI-03306 is effective for the
treatment of sleep apnea. Prior to commencing any clinical
trials for these or any of our other product candidates in the
United States, we will need to submit an IND to, and obtain
clearance from, the FDA. The INDs that we submit to the FDA for
most of our product candidates will incorporate the results of
certain preclinical studies and clinical trials conducted
outside the United States. We have received no assurance from
the FDA that it will agree with our approach of conducting later
stage trials in the United States solely on the basis of these
non-U.S. preclinical studies and early stage clinical trials.
The FDA may not accept these results and may request additional
preclinical studies before permitting the INDs and United States
clinical trials to proceed. Moreover, the FDA may subject the
trial data that we submit to additional scrutiny and we may
incur additional costs and delays responding to FDA requests for
supplemental information or clarification. If the FDA does not
allow INDs for one or more of our product candidates to proceed,
we will not be permitted to conduct clinical trials for these
product candidates in the United States and, therefore, we will
not be able to ultimately seek or obtain regulatory approval to
market these product candidates in the United States. As a
result, any delay in an IND becoming effective would delay the
further development and potential commercialization of our
product candidates and delay our ability to generate product
sales in the United States from such product candidates.
The fast track designation for tetrabenazine may not actually
lead to a faster development or regulatory review or approval
process.
If a drug is intended for the treatment of a serious or
life-threatening condition and the drug demonstrates the
potential to address unmet medical needs for this condition, the
drug sponsor may apply to the FDA for fast track designation.
Although we have received a fast track designation from the FDA
for tetrabenazine for the treatment of chorea associated with
Huntington’s disease, we may not experience a faster
development process, review or approval compared to conventional
FDA procedures. Our fast track designation may be withdrawn by
the FDA if it believes that the designation is no longer
appropriate. Our fast track designation does not guarantee that
we will qualify for, or be able to take advantage of, the
priority review procedures following the submission of our NDA.
If our fast track designation for tetrabenazine were to be
withdrawn, or if the FDA elects not to give our NDA priority
review, then our ability to receive FDA approval, if at all, and
to commercialize tetrabenazine in the United States, if
approved, could be delayed considerably, which would have a
material adverse effect on our cash flows and stock price.
Failure to obtain regulatory approval in international
jurisdictions would prevent us from marketing our products
abroad.
For those product candidates for which we own worldwide rights,
we plan to seek approvals in as many countries as possible. If
they are approved, we may choose to market them through our own
13
Risk factors
sales force or seek to out-license these rights. In order to
market our product candidates in Canada and many other foreign
jurisdictions, we must obtain separate regulatory approvals and
comply with numerous and varying regulatory requirements. With
respect to some of our product candidates, we expect that a
future collaborator will have responsibility to obtain
regulatory approvals outside the United States, and we will
depend on our collaborators to obtain these approvals. The
approval procedure varies among countries and can involve
additional testing. The time required to obtain approval in
another country may differ from that required to obtain FDA
approval. The foreign regulatory approval process may include
all of the risks associated with obtaining FDA approval, as well
as additional risks and requirements particular to individual
countries. We may not obtain foreign regulatory approvals on a
timely basis, if at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries or
jurisdictions. Approval by one foreign regulatory authority does
not ensure approval by regulatory authorities in other foreign
countries or jurisdictions or by the FDA. We and our
collaborators may not be able to file for regulatory approvals
and may not receive necessary approvals to commercialize our
products in any market.
We may incur significant liability if it is determined that
we are promoting unapproved, or “off-label,” use of
drugs.
Physicians may prescribe products for uses that are not
described in the product’s labeling and that differ from
those approved by the FDA or other similar regulatory agencies.
Such off-label uses are common across various medical
specialties. For example, we intend to initially submit an NDA
for tetrabenazine for the treatment of chorea associated with
Huntington’s disease. If the FDA approves tetrabenazine for
that indication, it is possible that physicians may also
prescribe it for the treatment of other hyperkinetic movement
disorders, as it is approved for such disorders in several
countries outside of the United States. Although the FDA and
other regulatory agencies do not regulate a physician’s
choice of treatments, the FDA and other regulatory agencies do
restrict communications by NDA holders on the subject of
off-label use. Accordingly, in the United States we would not be
permitted to promote or advertise tetrabenazine for the
treatment of any indications other than chorea associated with
Huntington’s disease prior to FDA approval of additional
indications for tetrabenazine, if any. The FDA and other
regulatory agencies actively enforce regulations prohibiting
promotion of off-label uses and the promotion of products for
indications for which marketing approval has not been obtained.
Notwithstanding the regulatory restrictions on off-label
promotion, the FDA and other regulatory authorities allow
companies to engage in truthful, non-misleading, and
non-promotional speech concerning their products. If we fail to
comply with the relevant regulatory requirements, we may be
subject to significant liability, including civil and
administrative remedies as well as criminal sanctions.
RISKS RELATED TO THE POTENTIAL COMMERCIALIZATION OF OUR
PRODUCT CANDIDATES
Our products may not be accepted in the marketplace.
Even if they are approved by regulatory authorities for
marketing, our products may never achieve market acceptance
among patients, physicians and the medical community. Our
products, if successfully developed, will compete with a number
of traditional drugs and therapies manufactured and marketed by
major pharmaceutical and other biotechnology companies. Our
products will also compete with new products currently under
development by these companies and others. The degree of market
acceptance of any products developed by us, alone, or in
conjunction with our collaborators, will depend on a number of
factors, including:
--
the establishment and
demonstration of the clinical efficacy and safety of the
products;
--
convenience and ease of
administration;
14
Risk factors
--
cost-effectiveness;
--
our products’ potential
advantages over alternative treatment methods;
--
marketing, sales and distribution
support of our products; and
--
reimbursement policies of
government agencies and third party payors (such as health
maintenance organizations).
Physicians may not prescribe, or patients may not purchase and
use, tetrabenazine, Lisuride Subcutaneous, Lisuride Transdermal,
D-Serine or PPI-03306 or any of our future product candidates,
even if they are approved. Physicians will prescribe our
products only if they determine, based on experience, clinical
data, side effect profiles and other factors, that they are
preferable to other products or treatment options then in use or
that they are beneficial in combination with other products.
Recommendations and endorsements by influential physicians will
be essential for market acceptance of our products, and we may
not be able to obtain these recommendations and endorsements.
According to the Canadian package insert, tetrabenazine is
contraindicated, or not recommended for use and may be harmful
for use, in patients with a prior history of depression, and
there is a chance that this warning could also be placed on the
United States label. As a result, some physicians may be
unwilling to prescribe tetrabenazine for their patients. The
lack of market acceptance of any of our product candidates would
significantly harm our business and results of operations.
We face uncertainty with respect to coverage, pricing, third
party reimbursements and healthcare reform.
Our ability to generate significant revenue from our products
may depend on our ability, and the ability of our collaborators
or customers, to obtain adequate levels of insurance, favorable
formulary acceptance and other coverage for our products and
reimbursement from third party payors such as:
--
government health administration
authorities;
--
private health insurers;
--
health maintenance organizations;
--
pharmacy benefit management
companies; and
--
other healthcare-related
organizations.
Third party payors may deny coverage or offer inadequate levels
of reimbursement for our product candidates for a number of
reasons, including:
--
if they determine that a
prescribed product has not received appropriate clearances, or
approvals, from the FDA or other government regulators for
specific indications;
--
if they determine that a
prescribed product is not used in accordance with cost-effective
treatment methods as determined by the third party payor;
--
if the third party payor prefers
other drugs or treatments by excluding our product from its
formulary or by requiring prior authorization before approving
our product for reimbursement;
--
if the third party payor
determines that the prescribed product is experimental,
unnecessary or inappropriate; or
--
for any other reason in their
absolute discretion.
15
Risk factors
If third party payors deny coverage or offer inadequate levels
of reimbursement, we may not be able to market our products
effectively if and when approved. We also may have to offer our
products at prices lower than anticipated as a result of the
purchasing power of large health maintenance organizations in
the United States. Currently, third party payors are
increasingly challenging the prices charged for medical products
and services and there is significant political attention and
pressure in relation to drug pricing in the United States.
Prices could be driven down by health maintenance organizations
that control or significantly influence purchases of healthcare
services and products. Existing United States laws, such as the
Medicare Prescription Drug and Improvement Modernization Act of
2003, or future legislation to reform healthcare or reduce
government insurance programs could also adversely affect prices
of our approved products for the United States market, if any.
The cost containment measures that healthcare providers are
instituting and the results of potential healthcare reforms may
prevent us from maintaining prices for our products that are
sufficient for us to realize profits and may otherwise
significantly harm our business and operating results.
In addition, to the extent that our product candidates are
approved for marketing outside of the United States, including
Canada where we currently market Nitoman, foreign government
pricing controls and other regulations may prevent us from
maintaining prices for our products that are sufficient for us
to realize profits and may otherwise significantly harm our
business, financial condition and operating results.
We are subject to a number of state and federal laws which
will restrict our marketing efforts.
In addition to FDA restrictions on marketing of pharmaceutical
products, several other types of state and federal laws have
been applied to restrict certain marketing practices in the
pharmaceutical industry in recent years. These laws include
anti-kickback statutes and false claims statutes.
The federal healthcare program anti-kickback statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting, or receiving remuneration to induce, or in return
for, purchasing, leasing, ordering, or arranging for the
purchase, lease, or order of any healthcare item or service
reimbursable under Medicare, Medicaid, or other federally
financed healthcare programs. This statute has been interpreted
to apply to arrangements between pharmaceutical manufacturers on
one hand and prescribers, purchasers, and formulary managers on
the other. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to
induce prescribing, purchases, or recommendations may be subject
to scrutiny if they do not qualify for an exemption or safe
harbor. Our practices may not in all cases meet all of the
criteria for safe harbor protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Recently, several pharmaceutical and other healthcare companies
have been prosecuted under these laws for allegedly providing
free product to customers with the expectation that the
customers would bill federal programs for the product. The
majority of states also have statutes or regulations similar to
the federal anti-kickback law and false claims laws, which apply
to items and services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the payor.
Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturer’s products
from reimbursement under government programs, criminal fines,
and imprisonment.
Because of the breadth of these laws and the narrowness of the
safe harbors, it is possible that some of our business
activities could be subject to challenge under one or more of
such laws. Such a challenge could have a material adverse effect
on our business, reputation and results of operations.
16
Risk factors
We could encounter unforeseen problems in scaling up our
product candidates for commercialization.
During product development and scale up, it is common for
changes to occur in the manufacturing process of the product
candidate. However, in some cases, the changes may be
significant. Such changes may produce previously unknown
impurities or contaminants. Moreover, these changes may result
in significant delays to approval and increase the cost of the
final product or, if the resulting impurities are too great,
prevent commercialization of the product altogether. The risk of
significant impurities occurring as a result of scaling up a
product candidate for commercialization are greatest for those
product candidates, such as D-Serine and PPI-03306, that are
intended to be commercialized for relatively large patient
populations and that have not yet been produced on a large
scale. If we experience difficulties in scaling any of our
product candidates for production, it will likely result in
either lower margins on the product sales or result in our
inability to sell the product altogether, either of which would
have a material adverse effect on our results of operations.
Our existing collaborative and licensing agreements contain,
and any such agreements that we may enter into in the future may
contain, non-compete and other covenants that restrict our
product development and commercialization activities and other
provisions that may expose us to significant potential
liability.
Certain of our existing license and collaborative agreements
contain covenants that restrict our product development or
future business efforts and impose, among other things,
limitations on our ability to license our product candidates to
third parties and restrictions on our ability to compete. In
particular, our agreements with Cambridge provide that, during
the term and for a twelve-month period following any product
“sell-off” period under the agreements, we do not have
the right to engage or assist third parties to be engaged in
product development or commercialization activities for other
tetrabenazine products, products containing active substances
similar to tetrabenazine, or products for the treatment of
hyperkinetic movement disorder symptoms that are treatable with
tetrabenazine, other than the product provided by Cambridge.
Because of these restrictive covenants, if our potential
licensees or collaborators fail to fulfill their obligations to
us or we are otherwise not able to maintain these relationships,
we would likely not be able to enter into alternative
arrangements or assume the development of these product
candidates ourselves. This would significantly affect our
ability to commercialize our product candidates. Further, even
if alternative arrangements are available to us, they also could
restrict our business activities. These restrictive covenants
also may preclude us from pursuing development of additional
products within our area of expertise, which could impair our
ability to execute our strategy and grow our business.
Certain of our existing license and collaboration agreements do
not contain limitations on the types of damages that may be
recovered by us or our collaborators in the event of any breach
of our agreement. Without these types of limitations, we may be
subject to significant potential liability to our collaborators
in the form of consequential and indirect damages should these
types of damages be established in the event of a breach of the
applicable agreement.
If we do not find development and commercialization
collaborators for our product candidates that address very large
markets, we may have to reduce or delay our rate of product
development and commercialization and increase our
expenditures.
We have entered into a collaboration agreement with NeuroBiotec
to independently develop and commercialize Lisuride Subcutaneous
and Lisuride Transdermal. We also intend to enter into
additional relationships with selected pharmaceutical or
biotechnology companies to help develop and commercialize
certain of our other current product candidates and product
candidates that we may in-license in the future. For example, we
believe that we will need to enter into development and
commercialization collaborations with large pharmaceutical
companies with respect to Lisuride
17
Risk factors
Transdermal for the treatment of Restless Legs Syndrome,
D-Serine for the treatment of schizophrenia, and PPI-03306 for
the treatment of sleep apnea in order to fully pursue our
product candidates for these indications that affect large
patient populations. We may not be able to negotiate
collaborations with these other companies for the development or
commercialization of our product candidates on commercially
acceptable terms, or at all. If we are not able to establish
such collaborative arrangements, we may have to reduce or delay
further development of some of our programs, increase our
planned expenditures and undertake development and
commercialization activities at our own expense.
If we enter into development or commercialization collaborations
with pharmaceutical or biotechnology companies, these
relationships will also be subject to a number of risks,
including:
--
we may lose control over when and
how our product candidates and products are developed and
commercialized;
--
collaborators may not pursue
further development and commercialization of product candidates
in the collaborations or may elect not to renew development and
commercialization programs;
--
collaborators may delay clinical
trials, underfund a clinical trial program, stop a clinical
trial or abandon a product candidate, repeat or conduct new
clinical trials or require the development of a new formulation
of a product candidate for clinical testing;
--
a collaborator with marketing and
distribution rights to one or more of our products may not
commit enough resources to the marketing and distribution of our
products, limiting our potential revenues from the
commercialization of these products; and
--
disputes may arise delaying or
terminating the development or commercialization of our product
candidates, or result in lengthy and costly legal proceedings.
If we experience one or more of these events in connection with
our collaboration efforts, it could cause us to receive fewer
benefits from our collaborations than we anticipated, which
would likely have a material adverse effect on our financial
condition.
If a cure is discovered and commercialized for one or more of
the diseases underlying the symptoms that we are developing our
product candidates to treat, our ability to generate revenues
from our product candidates would be severely impaired.
We are developing our product candidates as treatments for
symptoms associated with chronic diseases and are not developing
cures for the underlying diseases. In recent years, researchers
have made significant strides in searching for cures to chronic
diseases, particularly in the field of genomics. If a competitor
discovers and commercializes a cure for the underlying disease
of one or more of the indications that we are developing our
product candidates to treat, it would significantly diminish the
size of our target markets and reduce our ability to sell any
approved products. Additionally, because of the relatively small
patient populations represented by many of the indications that
we are developing our product candidates to treat, it is likely
that the commercialization of a cure for these diseases would
very quickly reduce the size of our target patient population to
the point at which it would not be commercially viable to
continue to pursue these indications. As a result, the discovery
of a cure for Huntington’s disease, Parkinson’s
disease, Restless Legs Syndrome, schizophrenia, sleep apnea or
any other disease that manifests the symptoms that our current
and future product candidates are being developed to treat would
have a material adverse effect on our future revenues.
We face intense competition.
The biopharmaceutical industry is intensely competitive and is
accentuated by the rapid pace of technological development. Many
pharmaceutical and biotechnology companies have developed or are
18
Risk factors
developing products that will compete with products we are
developing, and we expect to face increased competition in the
future as new companies enter our markets. Research and
discoveries by others may result in breakthroughs that render
our potential products obsolete even before they begin to
generate any revenue. Our competitors include major
pharmaceutical and biotechnology firms, many of which have
substantially greater research and product development
capabilities and financial, scientific and marketing resources
than we have. Several significant competitors are working on, or
already have United States approval for, therapeutic treatments
for many of the same indications that our product candidates
target, including but not limited to:
--
pramipexole, which is approved for
Parkinson’s disease and is in late stage clinical trials
for Restless Legs Syndrome, being developed by Pfizer;
--
gabapentin, which is in late stage
clinical trials for Restless Legs Syndrome, being developed by
XenoPort;
--
ropinirole, which is approved for
Parkinson’s disease and has been submitted to the FDA for
approval to treat Restless Legs Syndrome, being developed by
GlaxoSmithKline; and
--
rotigotine, a daily transdermal
patch, which has completed clinical trials for Parkinson’s
disease and Restless Legs Syndrome, and for which an NDA has
been submitted by Schwarz Pharma.
Additionally, while there are no FDA-approved drugs for the
treatment of chorea associated with Huntington’s disease, a
number of other pharmaceutical companies are exploring whether
their existing drugs that have been approved by the FDA for
another indication could be effective in treating chorea
associated with Huntington’s disease. These other drugs
include, but are not limited to:
--
levetiracetum, which is approved
for epilepsy, marketed by UCB S.A.;
--
amantidine, which is approved for
parkinsonism and is available generically; and
--
atypical antipsychotics, which are
approved for the treatment of schizophrenia and are marketed by
a number of pharmaceutical companies.
Although these drugs have not been approved for the treatment of
chorea associated with Huntington’s disease, it is possible
that physicians may prescribe them, and patients may obtain
them, on an “off-label” basis for that indication.
Such off-label use could hurt our potential sales of
tetrabenazine if it is approved by the FDA.
In addition, tetrabenazine does not benefit from any patent
protection, and the remainder of our product candidates have
only limited patent protection, in most cases relating to
particular uses or formulations but not their chemical
compositions or their active ingredients. Therefore, we will
have a limited ability to protect our competitive position
through our intellectual property rights.
Our competitors may obtain patents and regulatory approvals for
their products more rapidly than we or our collaborators, or
develop products that are more effective than those developed by
us or our collaborators. Any potential products we identify will
likely face competition from other companies developing similar
products as well as from companies developing other forms of
treatment for the same conditions.
Many of the companies developing competing products have
significantly greater financial resources than we have. Many
such companies also have greater expertise than we or our
collaborators have in discovery, research and development,
manufacturing, preclinical and clinical testing, obtaining
regulatory approvals and marketing. Other smaller companies may
also prove to be significant competitors, either on their own or
through collaborative arrangements with large and established
companies. These companies and institutions compete with us in
recruiting and retaining qualified
19
Risk factors
scientific and management personnel as well as in acquiring
technologies complementary to our programs. We will face
competition with respect to:
--
product efficacy and safety;
--
the timing and scope of regulatory
approvals and regulatory exclusivity;
--
availability of resources;
--
reimbursement coverage; and
--
price and patent position,
including the patent positions of others that could potentially
prevent us from commercializing our product candidates.
Our competitors may develop products that are less expensive,
more effective or safer than the product candidates that we may
develop, which would potentially render our product candidates
obsolete or uneconomical. We cannot assure you that any product
we develop will be preferred to any existing or newly developed
alternative products or therapies.
If we become subject to product liability claims, the damages
may exceed our insurance and defense of product liability claims
may take excessive management time.
It is impossible to predict from the results of animal studies
the potential adverse effects that a product candidate may have
in humans. We face the risk that the use of our product
candidates in human clinical trials will result in adverse
effects. If we complete clinical testing for our product
candidates and receive regulatory approval to market our
products, we will mark our products with the warnings approved
by the FDA (and other similar regulatory authorities for
products sold in other countries) that identify the known
potential adverse effects and the patients who should not
receive our product. We cannot assure you that physicians and
patients will comply with these warnings, and these warnings may
not protect us from liability, even if our product is misused.
In addition, unexpected adverse effects may occur even with
proper use of our products that have received approval for
commercial sale. Furthermore, we may be sued if third parties
allege that the warnings on our products do not adequately warn
doctors and patients about the known risks associated with our
products. It may not be an effective defense against these
claims that we are not legally permitted to label our products
with language other than that approved by the FDA.
Administering our product candidates to humans may produce
serious and undesirable side effects. The potential adverse
effects associated with product candidates that target the CNS
include, but are not limited to, sedation, insomnia, depression,
low blood pressure, confusion, hallucinations, seizures, suicide
and impaired movement or motor control. These side effects could
result in liability claims.
We have obtained liability insurance of $5 million for
Nitoman and our product candidates in clinical trials. We cannot
predict all of the possible harms or side effects that may
result and, therefore, the amount of insurance coverage we
currently hold, or that we or our collaborators may obtain, may
not be adequate to protect us from any liabilities. In addition,
if any of our product candidates are approved for marketing, we
would need to seek additional insurance coverage. We may be
unable to obtain additional coverage or afford such coverage. We
may not have sufficient resources to pay for any liabilities
resulting from a claim beyond the limit or outside the scope of
our insurance coverage. If we cannot protect against potential
liability claims, we or our collaborators may find it difficult
or impossible to commercialize our products.
We may not be able to renew or increase our insurance on
reasonable terms, if at all. If we are sued for product
liability claims, and if the amount of any damages exceeds our
insured liabilities, it would have a materially adverse effect
on our financial condition and results of operations.
Additionally, any product liability or other claim, or any
product recall would likely result in the diversion of
significant
20
Risk factors
management attention and could harm our reputation, which could
materially adversely effect our ability to develop and
commercialize our current or future product candidates.
Under certain of our license agreements and collaborations, we
are the party that will actually market the product candidate,
if approved, in the United States and any other country where we
may have marketing rights. As a result, if there are problems
with the product in these markets, we may be the collaborator
that is sued and, if found liable, we may be forced to pay
damages to injured parties (to the extent not covered by
insurance). We may not be able to enforce any rights we may have
to indemnification or liability sharing from our collaborators,
even though they share in the financial benefits of the product.
Our license and collaboration agreements may require us to
indemnify our licensor or collaborator for any product liability
claims or losses they may suffer. We may not be able to control
the defense of claims for which we must indemnify our
counterparties. As a result, we may not be able to act to
control or seek to minimize certain of our contractual
liabilities.
Because many prospective patients of our tetrabenazine
product candidate suffer from depression and related illnesses,
it is possible that a patient taking tetrabenazine could attempt
or commit suicide, which could have a significantly negative
impact on our reputation and expose us to litigation.
Patients who suffer from Huntington’s disease typically
experience a number of symptoms in addition to chorea associated
with Huntington’s disease. In particular, a large portion
of these patients suffer from depression and related illnesses.
In our recent pivotal Phase III trial, one of the patients
in the trial committed suicide while taking tetrabenazine and
the lead investigator of the trial determined that the suicide
was possibly related to tetrabenazine. Also, another
Huntington’s disease patient committed suicide following
the completion of a clinical trial, during which he had received
tetrabenazine, which was conducted in the early 1980s at the
Baylor College of Medicine. In light of the increased incidence
of suicide, the third leading cause of death among patients with
Huntington’s disease, it is possible that a patient who is
taking tetrabenazine may attempt or commit suicide. If this
occurs, it could expose us to significant potential liability
even though our product labeling may include warnings concerning
the risk of suicide while taking our product. Additionally, such
an event could result in regulatory action, such as fines, civil
penalties, injunctions, suspensions or withdrawal of regulatory
approvals, product recalls, seizure of products, operating
restrictions and, potentially, criminal liability, any of which
would likely harm our reputation and our results of operations.
If we are unable to develop adequate sales and marketing
capabilities or enter into agreements with other parties to
perform some of these functions, we will not be able to
commercialize our products effectively.
While the senior members of our sales and marketing team have
significant experience marketing drugs in the United States and
Canada, in order to successfully commercialize our product
candidates, we must build a sales and marketing organization
with appropriate technical expertise and marketing capabilities.
For some market opportunities, such as Lisuride Transdermal for
the treatment of Restless Legs Syndrome and D-Serine for the
treatment of schizophrenia, we may need to enter into
co-promotion or other licensing arrangements with larger
pharmaceutical or biotechnology firms in order to reach the
large base of potential prescribing physicians and increase the
commercial opportunity for our product candidates. We may not be
able to establish sufficient sales and marketing capabilities of
our own or enter into such arrangements with other parties in a
timely manner or on acceptable terms. To the extent that we
enter into co-promotion or other licensing arrangements, our
per-unit product revenues are likely to be lower than if we
directly marketed and sold our products, and some or all of the
revenues we receive will depend upon the efforts of other
parties, and these efforts may not be successful. Our product
revenues may also be reduced by patients obtaining generic forms
of our products from sources outside the United States.
Additionally, building marketing and distribution
21
Risk factors
capabilities may be more expensive than we anticipate, requiring
us to divert capital from other intended purposes or preventing
us from building our marketing and distribution capabilities to
the desired levels.
Our attempts to increase future revenues from Nitoman may be
unsuccessful.
Our current revenue is derived solely from Canadian sales of
Nitoman and we recorded $0.5 million in net revenues from
this product in the year ended December 31, 2004. The costs
associated with manufacturing and selling Nitoman currently
exceed the revenues we receive on sales of Nitoman. We have
recently announced a price increase for Nitoman in Canada in an
effort to increase revenues from Nitoman. However, there can be
no guarantee that this price increase, or future anticipated
price increases, will be successful. We may only realize a price
increase on Nitoman in those provinces of Canada whose
government agrees to the increase. One province, Quebec, has
refused to implement newly announced price increases on
pharmaceuticals, and other provinces may refuse to do so as well
and, as a result, we believe that this initiative in Canada
could lead to only modest increases in revenue from Nitoman.
Moreover, Nitoman does not currently benefit from any form of
regulatory exclusivity in Canada and, if a competitor were to
introduce a generic form of tetrabenazine in Canada, it would
likely have the effect of decreasing the prices at which we
could sell Nitoman and could reduce the volume of sales as well.
If we do not maintain or increase our sales of Nitoman in
Canada, our operating losses will increase. We could also be
forced to discontinue our Canadian sales program, depriving us
of potential commercialization and sales experience and contacts
which may be important for the successful commercial launch in
the United States of any of our product candidates that receive
regulatory approval.
Re-importation could reduce our potential sales of
tetrabenazine in the United States, if and when approved.
There is a risk that Nitoman purchased in Canada could be
re-imported into the United States or that patients in the
United States will engage in cross-border purchases of
tetrabenazine. The risk of re-importation of tetrabenazine could
increase if a generic form were marketed anywhere in the world
through Internet or mail order pharmacies or other forms of
personal importation to United States patients at a significant
discount, compared to the expected sales price of tetrabenazine
in the United States. The risk of this occurring may be
increased as a result of our recent increase in the sales price
of Nitoman in Canada.
We do not have rights to a pump necessary to use our Lisuride
Subcutaneous product candidate if and when we receive regulatory
approval to market it.
We currently have not selected a manufacturer for the pump that
we would expect to use in developing and commercializing
Lisuride Subcutaneous. Although we are considering different
varieties of pumps from different manufacturers, we have not
entered into any agreements for the supply of the pumps or for
intellectual property relating to any pump. We may not be able
to enter into an agreement with a manufacturer to provide a
pump, or if we enter into such an arrangement, our manufacturer
may not be able to supply pumps in sufficient quantities. Even
if we are able to arrange for the supply of a pump, we may not
be able to do so on commercially acceptable terms. Failure to
enter, or any delay in entering, into a supply arrangement for a
pump for Lisuride Subcutaneous on acceptable terms, or at all,
would seriously harm our ability to commercialize Lisuride
Subcutaneous, and would have a material adverse effect on our
business.
Moreover, each of the pumps that we are considering dispense
lisuride in a different manner. If we elect to use a different
pump for the commercialization of Lisuride Subcutaneous than we
and NeuroBiotec have used or may use in our future clinical
trials, the FDA or foreign regulatory authority
22
Risk factors
may require additional testing to establish the safety of
lisuride being administered through the new pumps. If this
occurs, it will likely result in a significant delay in the
potential approval of Lisuride Subcutaneous, which would harm
our results of operations.
Manufacturers of pumps are also subject to regulation by the FDA
and foreign regulatory authorities. Their facilities are subject
to inspection by regulatory agencies at any time. If the pump
manufacturer we choose fails to comply with applicable
regulatory requirements, it could be required to take remedial
actions, stop production, or close the facility, which would
disrupt the manufacturing process and limit our supply of
Lisuride Subcutaneous. As a result, we would likely be forced to
curtail our clinical trials for this product candidate or, if
this were to occur after we receive approval to market Lisuride
Subcutaneous, it could interrupt our product sales, either of
which would have a material adverse impact on our results of
operations.
RISKS RELATED TO OUR FINANCIAL RESULTS AND NEED FOR
ADDITIONAL FINANCING
We are at an early stage of development as a company and we
do not have, and may never have, any products that generate
significant revenues.
We are at an early stage of development as a specialty
pharmaceutical company. Other than very limited sales of Nitoman
in Canada, we do not have any products approved by a regulatory
agency that generate revenues. While we intend to submit an NDA
for tetrabenazine in the near future, we cannot be certain
whether it will be approved for marketing in the United States.
The remainder of our existing product candidates will require
extensive additional clinical evaluation, regulatory review,
significant marketing efforts and substantial investment before
they could possibly provide us with any revenues. Our efforts
may not lead to commercially successful products, for a number
of reasons, including:
--
our product candidates may not
prove in clinical trials to be safe and effective or to provide
significant advantages over other therapies;
--
we may not be able to obtain
regulatory approvals for our product candidates or approvals may
be for fewer indications than we seek or contain risk
information that limits our ability to market the product;
--
we may not have adequate financial
or other resources to complete the development and
commercialization of our product candidates;
--
any products that are approved may
not be accepted in the marketplace; or
--
even after a product is approved,
it may be withdrawn for a number of reasons, including negative
post-approval experiences with the product.
As a result, we may not be able to market any of our product
candidates for a number of years, if at all. If we are unable to
develop, receive approval for, and successfully commercialize
any of our product candidates, we will be unable to generate
significant revenues. If our development programs are delayed,
we may have to raise additional capital sooner, or in greater
amounts, than we currently anticipate, or we may be forced to
reduce or cease our operations.
We have incurred losses since our inception and expect to
incur significant losses for the foreseeable future; we may
never reach profitability.
We have experienced significant operating losses since our
inception in 2002. At December 31, 2004, we had an
accumulated deficit of $(32.1) million. For the years ended
December 31, 2004 and 2003, and the period from inception
through December 31, 2002, we had net losses of
$(20.0) million, $(10.5) million and
$(1.5) million, respectively. Revenues from the commercial
sales of our only
23
Risk factors
approved product, Nitoman in Canada, were $0.5 million in
2004, and we will not achieve profitability from the sales of
this product alone. To date, we have funded our operations
principally from the sale of our equity securities. We also
expect to continue to incur significant operating expenses and
capital expenditures and anticipate that our expenses will
increase substantially in the foreseeable future as we:
--
prepare to launch our lead product
candidate, tetrabenazine, in the United States for the treatment
of chorea associated with Huntington’s disease;
--
conduct clinical trials of
lisuride, D-Serine and PPI-03306, and of tetrabenazine for
additional indications;
--
conduct preclinical studies on
existing and new product candidates;
--
make milestone payments to our
licensors;
--
seek regulatory approvals for our
product candidates;
--
hire additional clinical,
scientific, management and sales and marketing personnel;
--
add operational, financial and
management information systems and personnel; and
--
identify additional compounds or
product candidates and in-license rights from third parties to
those compounds or product candidates.
To become profitable, we, either alone or with our
collaborators, must successfully develop and market our current
product candidates, and continue to identify, develop, acquire,
and market other new product candidates. We may never have any
significant revenues or become profitable.
If we fail to obtain additional financing, we may be unable
to complete the development and commercialization of our current
and future product candidates.
Our operations have consumed substantial amounts of cash since
inception. To date, our sources of cash have been primarily
limited to the private sale of our equity securities. We expect
to continue to spend substantial amounts on in-licensing and
development, including amounts spent on conducting clinical
trials of lisuride, D-Serine, and PPI-03306, and of
tetrabenazine for additional indications, and manufacturing
clinical supplies. We expect that the net proceeds from this
offering, together with our existing capital resources, will be
sufficient to fund our operations for at least the
next months. We believe that
these resources will fund our operations through the anticipated
launch of tetrabenazine in the United States, if we receive
approval of our initial NDA submission when expected. We will be
required to raise additional capital to complete the development
and commercialization of our other current product candidates as
well as to acquire and develop any future product candidates
that we may seek to develop. If we are unable to raise
additional capital when required or on acceptable terms, we may
have to significantly delay, scale back or discontinue one or
more of our product candidate development programs or forego
plans to acquire or in-license additional product candidates. We
also may be required to:
--
seek collaborators for our product
candidates at an earlier stage than otherwise would be desirable
and on terms that are less favorable than might otherwise be
available;
--
relinquish, license or otherwise
dispose of rights to technologies, product candidates or
products that we would otherwise seek to develop or
commercialize ourselves, on terms that are less favorable than
might otherwise be available; and
--
relinquish rights to
tetrabenazine, because our contracts for rights to tetrabenazine
require us to maintain sufficient capital to diligently market
it in the United States and Canada.
24
Risk factors
We may face fluctuations in operating results.
Revenues from the sales of our potential products may not occur
for at least several years, if at all. As a result, we may
experience fluctuations in our operating results from quarter to
quarter and continue to generate losses. Our operating results
may rise or fall significantly as a result of many factors,
including:
--
the amount of in-licensing and
product development we engage in;
--
the number of product candidates
we have and their progress in clinical trials;
--
the payment of non-recurring
milestone payments upon the achievement of developmental
milestones;
--
the incurrence of significant
expenses in connection with, or in anticipation of, new product
launches;
--
the expansion of our facilities to
support our operations;
--
entering into new, and maintaining
existing, collaborative relationships;
--
the scope, duration and
effectiveness of our collaborative arrangements;
--
changes in government
regulation; and
--
the release of successful products
into the market by our competitors.
As a result, quarterly comparisons of our financial results may
not necessarily be meaningful, and investors should not rely
upon such results as an indication of our future performance. In
addition, investors may react adversely if our reported
operating results are less favorable than in a prior period or
are less favorable than those anticipated by investors or the
financial community, which may result in a significant decline
in our stock price.
Currency fluctuations may negatively affect our financial
condition.
We sell Nitoman in Canada and also expect to commercialize other
products outside the United States and, as a result, our
business is affected by fluctuations in foreign exchange rates
between the United States dollar and the Canadian dollar and is
expected to be affected by exchange rates with other foreign
currencies. Although the majority of our expenses in connection
with this program are denominated in United States dollars,
substantially all of our revenues are currently denominated in
Canadian dollars and our supply contract for Nitoman with
Cambridge is priced in Canadian dollars. Our reporting currency
is the United States dollar and, as a result, financial
positions are translated into United States dollars at the
applicable foreign exchange rates. Therefore, increases in the
value of the United States dollar compared to the Canadian
dollar could have a material adverse effect on our results of
operations, financial condition and cash flows.
In addition, we have conducted a number of clinical trials in
the European Union, and in the future we expect to continue to
conduct clinical trials outside of the United States. The
expenses that we incur in connection with these clinical trials,
including manufacturing costs, are generally denominated in the
currencies of the countries in which we conduct the trials,
exposing us to cost increases if the United States dollar
declines in value compared to these currencies. We currently do
not have hedging strategies or agreements in place and, as a
result, as exchange rates fluctuate, such fluctuations may
adversely affect our results of operations.
25
Risk factors
RISKS RELATED TO OUR DEPENDENCE ON OTHER PARTIES FOR
MANUFACTURING AND CLINICAL RESEARCH ACTIVITIES
Since we will rely on contract manufacturers, we may be
unable to control the availability or cost of producing our
products.
We do not currently own or operate manufacturing facilities nor
do we have experience in manufacturing pharmaceutical products.
We rely and expect to continue to rely on outside parties to
produce all clinical and commercial quantities of our product
candidates. There can be no assurance that our product
candidates, if approved, can be manufactured in sufficient
commercial quantities, in compliance with cGMP and at an
acceptable cost.
Furthermore, our contract manufacturers may encounter
manufacturing or quality control problems or may be unable to
obtain or maintain the necessary governmental licenses and
approvals to manufacture our product candidates or may be unable
to properly manufacture our products. Any such failure could
delay or prevent us from receiving regulatory approvals and
marketing our products or, if we are already marketing the
product at the time of such failure, may cause an interruption
in supply. Our dependence on outside parties may reduce our
profit margins and delay or limit our ability to develop and
commercialize our products on a timely and competitive basis.
We currently have only one manufacturer for each product or
product candidate and, therefore, we may face interruptions or
shortages in supply.
Relying on a sole manufacturing source for the supply of our
product candidates and commercial products exposes us to the
risk that we may have to find a replacement manufacturing source
on little or no advance notice. Establishing a replacement
source for any of our products could require a long lead time
and significant additional expense. Additionally, we may face
liability for our failure to maintain continuous supply of our
products to the market. We would need to establish new
relationships with different contract manufacturers for our
products. We may not be able to contract for manufacturing
capabilities on acceptable terms, if at all.
If our sole manufacturer of a product experiences cGMP or other
problems (including earthquake, fire, natural disaster,
contamination or other interruption or impairment of a
facility’s operations), our product supply could be
interrupted for a significant period of time, which would likely
have a material adverse effect on our business.
For tetrabenazine, we will be required to purchase minimum
amounts of tetrabenazine exclusively from Cambridge, subject to
certain limited rights to establish and maintain a second source
supplier through Cambridge under certain circumstances.
Cambridge may discontinue supply of tetrabenazine upon no less
than six months prior notice if it no longer is commercially
practical for Cambridge to supply tetrabenazine. We currently
maintain a six month supply, based on our expected Canadian
sales, of Nitoman tablets in inventory for the Canadian market.
If tetrabenazine is approved for commercialization in the United
States, we intend to maintain a three month supply of
tetrabenazine tablets for United States distribution based on
expected sales. If we lose supply from Cambridge, we would be
required to identify a new manufacturer, reach agreement with
the new manufacturer as to supply terms, establish the process
for making tetrabenazine by the new manufacturer, and receive
regulatory approval from the FDA and the Canadian regulatory
authority, Health Canada, to market quantities of tetrabenazine
produced by the new manufacturer. These steps would likely take
more than six months to complete, or we may not be able to
complete them at all, in which case our supply and commercial
sales of tetrabenazine may be interrupted or cease altogether,
which would have a material adverse effect on our results of
operations.
26
Risk factors
Our contract manufacturers and their manufacturing facilities
and processes are subject to regulatory oversight and approval,
which may delay or disrupt our development and commercialization
efforts.
Contract manufacturers of our product candidates or products
must ensure that all of the processes, methods and equipment are
compliant with cGMP on an ongoing basis, mandated by the FDA and
other regulatory authorities, and conduct extensive audits of
vendors, contract laboratories and suppliers. The cGMP
requirements govern quality control of the manufacturing process
and documentation policies and procedures. Compliance by
contract manufacturers with cGMP requires record keeping and
quality control to assure that the product meets applicable
specifications and other requirements. Manufacturing facilities
are subject to inspection by the appropriate regulatory agency
at any time. If an inspection by regulatory authorities
indicates that there are deficiencies, contract manufacturers
may be required to take remedial actions, stop production or
close the facility, which would disrupt the manufacturing
processes and limit the supplies of our products or product
candidates. If they fail to comply with these requirements, we
also may be required to curtail the clinical trials of our
product candidates, and may not be permitted to sell our
products or may be limited in the jurisdictions in which we are
permitted to sell them.
Due to our reliance on contract research organizations or
other unaffiliated parties to perform product development
services, we are unable to directly control the timing, conduct
and expense of our product development efforts.
We rely primarily on outside parties, including contract
research organizations and outside consultants to manage,
monitor and conduct our toxicology studies, clinical trials and
other development services. As a result, we have had and will
continue to have less control over the conduct of the toxicology
studies and clinical trials, the timing and completion of the
trials, the required reporting of adverse events and the
management of data developed through the trials than would be
the case if we were relying entirely upon our own staff.
Communicating with outside parties can also be challenging,
potentially leading to mistakes as well as difficulties in
coordinating activities. Our reliance on these outside parties
may result in delays in completing, or in failing to complete,
these trials, or a failure to obtain usable or reliable data
from these trials, if they fail to perform with the speed and
competency we expect. Outside parties may have staffing
difficulties, may undergo changes in priorities or may become
financially distressed, adversely affecting their willingness or
ability to conduct our trials. We may experience unexpected cost
increases that are beyond our control. If these outside parties
fail to comply with required standards associated with clinical
trials, we could be required to redesign and/or repeat certain
clinical trials. Problems with the timeliness or quality of the
work of a contract research organization may lead us to seek to
terminate the relationship and use an alternative service
provider. However, making this change may be costly and may
delay our trials. Contractual restrictions may make such a
change difficult or impossible. Additionally, it may be
impossible to find a replacement organization that can conduct
our trials in a timely or acceptable manner and at an acceptable
cost. Delays associated with our clinical trials would be costly
and would prevent us from meeting our anticipated development or
commercialization timelines, which could cause the price of our
shares to decline substantially.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
Tetrabenazine is not protected by any patents, and the rest
of our current product candidates only have limited patent
protection. We may not be able to obtain and maintain orphan
drug or Hatch-Waxman Act exclusivity for tetrabenazine and other
product candidates, and any market exclusivity, if obtained,
would only afford us limited protection.
Regulatory authorities in some jurisdictions, including Europe
and the United States, may designate drugs for relatively small
patient populations as orphan drugs. Because tetrabenazine has
no patent
27
Risk factors
protection and the remainder of our product candidates have
limited patent protection, in most cases limited to particular
uses or formulations, we do not intend to rely primarily on
patent protection for them. Therefore, we will seek to rely on
orphan drug exclusivity as a primary method of achieving
market exclusivity in the United States for product candidates
that address small patient populations. We will also seek
regulatory exclusivity under the Hatch-Waxman Act.
A product that has orphan drug designation and is the first to
receive FDA approval for the designated indication is entitled,
subject to certain limited exceptions, to market exclusivity for
that indication in the United States for seven years with
respect to other products containing the same active
pharmaceutical ingredient. If we are not first to receive FDA
approval for our orphan drug indication, we would generally be
prevented from having our product candidate approved for that
orphan drug indication for up to seven years. In addition, even
if we are first to obtain approval for our orphan drug
indication, orphan drug exclusivity may not prevent other market
entrants. The FDA may approve a competitor’s clinically
superior version of our orphan-designated drug for that
indication or from approving the same drug for a different
indication. Orphan drug exclusivity does not prevent the FDA
from approving a different drug for the same indication. In
addition, clinicians may choose to use products that have been
approved for other indications to treat the orphan indication.
Moreover, even if we receive orphan drug exclusive marketing
rights, these rights may be lost if the FDA later determines
that our request for orphan drug designation was materially
defective, or if we are unable to assure sufficient quantity of
the drug. Furthermore, if a competitive product that contains
the same active pharmaceutical ingredient as our product is
shown to be clinically superior to our product, any orphan drug
exclusivity we have obtained will not block the approval of such
competitive product. Also, our product candidates might not be
entitled to orphan drug exclusivity if we were to obtain FDA
approval for a disease indication affecting a patient population
of more than 200,000. Therefore, we cannot assure you as to the
precise scope of protection that may be afforded by
tetrabenazine’s orphan drug designation for
Huntington’s disease and for moderate to severe tardive
dyskinesia or, if received, the orphan drug designations of
tetrabenazine for additional indications or of any of our other
product candidates. If we do not successfully obtain and retain
orphan drug exclusivity, the revenue potential for our product
candidates would be severely adversely impacted.
Under the Drug Price Competition and Patent Term Restoration Act
of 1984, commonly known as the Hatch-Waxman Act, our products
may be eligible for a limited period of protection from generic
competition. If granted by the FDA, any Hatch-Waxman exclusivity
will run concurrently with any other Hatch-Waxman exclusivity
and any orphan drug exclusivity that may be granted for the
drug. Our competitors will be free during any period of
statutory exclusivity to develop the data necessary either to
file an abbreviated new drug application, or ANDA, or to conduct
studies in support of a complete NDA submission during our
period of market exclusivity. If we are not the first to obtain
approval of a product candidate, then exclusivity awarded to our
competitor could delay or prevent us from having our product
candidate approved. If we do not successfully obtain and retain
marketing exclusivity under the Hatch-Waxman Act or orphan drug
exclusivity, the revenue potential for our product candidates
would be severely adversely affected.
We rely extensively on compounds and technology licensed from
outside parties and termination of any of those licenses would
prevent us from marketing our product candidates.
We have obtained certain rights to develop and commercialize our
product candidates and Nitoman through license and distribution
agreements with outside parties. These agreements generally may
be terminated by our counterparty if we materially breach any of
our obligations under the agreement. These agreements generally
require us to meet specified milestones, timely satisfy
applicable marketing objectives, or show commercially reasonable
diligence in the development and commercialization of the
compounds or technology under the license. We may disagree with
our licensors as to our obligations
28
Risk factors
under the agreement or the interpretation of provisions in the
agreement, and such disagreements could cause our licensors to
seek to terminate our rights to the product or product
candidate. If any of our agreements were terminated, we would
lose the rights to the product or product candidate covered by
the agreement, reducing our potential revenues and significantly
harming our business.
Some of our agreements include termination rights allowing the
other party to terminate in specific circumstances, even when we
have not breached or failed to perform our obligations. For
example,Cambridge has the right to terminate our
United States and Canadian agreements for tetrabenazine under a
potentially broad range of circumstances, including if:
--
we fail to use “reasonable
commercial diligence” to develop and commercialize
tetrabenazine;
--
we fail to purchase and sell
certain forecasted minimum quantities of tetrabenazine for
specified periods, which may extend beyond any period of market
exclusivity, could potentially be higher than we believe we are
able to meet, and may automatically increase substantially and
repeatedly without our consent and as a result of factors
outside of our control;
--
we fail to obtain “sufficient
capital” to enable us to perform our obligations under the
agreement prior to the first commercial sale of an approved
tetrabenazine product in the United States, if ever; or
--
at any time during the 18 month
period following a “change in control” of our company,
Cambridge reasonably believes that the applicable product will
not be given “sufficient priority” following the
change in control.
Additionally, Cambridge may have the right to terminate our
United States agreement if, prior to the completion of our
development obligations under the development plan, we fail to
retain Dr. Clarence-Smith as the person with primary
responsibility for implementing such obligations, except in
certain defined circumstances.
Under some of our license agreements, we may not be entitled to
assign the agreement, or our rights under the agreement, if we
are acquired. Therefore, the licenses could be terminated if we
engage in certain business combinations or other transactions.
Certain of our agreements with our licensors are governed under
laws of foreign countries, including our agreements with
NeuroBiotec and Schering regarding lisuride, which are governed
under German law and our agreements with Cambridge regarding
tetrabenazine, which are governed under the laws of England. As
a result, any licensing disputes that we may have with our
licensors may not be resolved in the same manner as if these
agreements were governed under United States law.
In addition, certain of our licensors secured rights to the
licensed technology from one or more third parties and our
licensed rights are subject to these underlying third party
agreements. We are subject to such risks with tetrabenazine and
lisuride, where we do not have the right to continue our rights
to the applicable technology and/or intellectual property if our
licensor’s agreement with the third party is terminated. If
these underlying agreements are terminated or modified, we will
lose our rights to such products and product candidates and our
potential revenues will be substantially reduced. We may not be
able to receive rights on satisfactory terms directly from the
applicable third party for the product candidate or product and
we may lose the rights to such product candidate or product.
Also, if we are able to secure rights from the applicable third
party, but only on less favorable terms than those we currently
have for the applicable product or product candidate, our
anticipated profit margins on the product or product candidate
would be reduced. We are also subject to risks if NeuroBiotec
decides to no longer pursue, maintain or defend the intellectual
property rights it received from Schering, in which case we
could lose our right to the technology and/or intellectual
property, including new and supplementary applications developed
independently using the intellectual property received from
29
Risk factors
Schering. Some of our agreements include provisions that convert
our exclusive license into a non-exclusive license. For example,
NeuroBiotec has the right to convert our exclusive right to sell
Lisuride Transdermal and Lisuride Subcutaneous, if we fail to
“timely satisfy the applicable marketing objectives,”
which marketing objectives are to be negotiated in the future.
The commercial success of our products will be dependent upon
our ability to protect the intellectual property rights
associated with certain of our product candidates.
Our competitive success will depend in part on our ability, or
the ability of our licensors, to obtain and maintain patent
protection for inventions, technologies and other intellectual
property that we develop or in-license. The patent positions of
biotechnology and pharmaceutical companies involve complex legal
and factual questions, and we cannot guarantee that patents that
we obtain or in-license will successfully preclude others from
using technology that we rely upon. We could incur substantial
costs in seeking enforcement of our proprietary rights against
infringement.
We depend on our collaborators and other licensors to protect
the intellectual property they have licensed to us. We may
disagree with any of these licensors as to patent strategy or
encounter other conflicts with them relating to the patent
applications and patents. These licensors could fail to take a
necessary step to protect our licensed intellectual property,
which could seriously harm our intellectual property position
and our ability to commercialize a product candidate.
We currently have in-licensed patents and pending patent
applications that cover technology relating to certain of our
in-licensed product candidates. Other product candidates, such
as tetrabenazine, have no patent protection. We and our
licensors plan to continue to apply for patents for the
technologies that we rely upon. Patent applications that we own
and that are licensed to us may not issue as patents in their
current forms or at all, and any patent issued or licensed to us
could be challenged, invalidated, circumvented or held
unenforceable by way of an interference proceeding, litigation
or other procedural challenge.
The timing of the grant of a patent cannot be predicted. Seeking
to successfully prosecute patent applications describing and
seeking patent protection of methods, compositions, or processes
relating to proprietary inventions involving human therapeutics
could require us or our licensors to generate data, which may
involve substantial costs to us. Our pending patent applications
or in-licensed patent applications may not result in the
issuance of patents or may result in the issuance of patents
with claims narrower than those sought in the application.
Having a patent application on file does not indicate or
guarantee that the named inventor was the first or true inventor
of what is claimed in the application. There are many reasons
that an application may not result in the issuance of a patent.
Even if issued, patents we obtain or in-license may not be
sufficiently broad to provide protection against competitors
with similar technologies or products and may be challenged,
invalidated, found to be unenforceable or circumvented.
In addition to patents, we rely on a combination of trade
secrets, proprietary know-how, copyright and trademark laws,
nondisclosure agreements, licenses and other contractual
provisions and technical measures to maintain and develop our
competitive position with respect to intellectual property.
Nevertheless, these measures may not be adequate to safeguard
the technology underlying our products. For example, employees,
consultants and others who participate in the development of our
products may breach their agreements with us regarding our
intellectual property and we may not have adequate remedies for
the breach. Our trade secrets and proprietary know-how could
become known through other unforeseen means.
We are seeking patent protection outside the United States for
certain of our product candidates. Regardless of whether we are
able to obtain and maintain patent protection outside the United
States,
30
Risk factors
the laws of foreign countries may not protect our intellectual
property rights to the same extent as do the laws of the United
States.
Notwithstanding our efforts to protect our intellectual
property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior
to our technology or products. Our competitors may also develop
similar products without infringing any of our intellectual
property rights or design around our proprietary technologies.
Certain of our intellectual property may be subject to license
grants back to our licensors, which could prevent us from
exploiting associated technology and result in additional
expense to us.
If we fail to obtain and maintain new product licenses and
collaborative arrangements, our business will be harmed.
The success of our business is dependent, in significant part,
upon our ability to enter into and maintain product licenses and
collaboration agreements and to manage effectively the numerous
issues that arise from such arrangements. Management of our
relationships with these licensors has required and will require:
--
a significant amount of our
management team’s time and effort;
--
effective allocation of our and
our licensors’ and collaborators’ resources to
multiple projects;
--
negotiation and execution of, and
compliance with, agreements with licensors as to ownership and
protection of proprietary rights, and development plans,
including clinical trials or regulatory approval strategy;
--
effective resolution of disputes
and interpretations of various provisions under our agreements;
and
--
our hiring and retaining of
management, scientific and other personnel.
If we are unable to obtain and maintain new product licenses and
collaborative arrangements, our business will be harmed.
We are subject to a number of risks associated with
in-licensing products under development.
Conducting product development and commercialization under a
collaboration or license agreement subjects us to risks of not
being able to control decisions and development as much as we
might prefer. For example, Cambridge has the discretion to make
many decisions regarding the development and commercialization
of the tetrabenazine products in the United States and Canada.
This may limit our ability to effectively manage and implement
the development and marketing of products in those territories.
Additionally, we do not have rights to develop improved,
proprietary products (including new formulations of
tetrabenazine) under the Cambridge agreements, which may hinder
our ability to extend market exclusivity, if any, in a
particular territory, broaden the therapeutic benefits of the
tetrabenazine products, prevent our competitors from developing,
manufacturing and marketing tetrabenazine products, and seek
expanded revenue opportunities under the existing agreements.
Due to these factors and other possible disagreements with
Cambridge, we may be delayed or prevented from developing or
commercializing tetrabenazine. In addition, we may become
involved in litigation or arbitration in order to establish or
enforce our rights, which would likely be lengthy and expensive
and would divert management time and attention and could result
in our losing important rights under the relevant agreement. If
any of these events occurs, it could have a material adverse
effect on our stock price.
31
Risk factors
We may be accused of infringing the proprietary rights of
others, which could impair our ability to successfully
commercialize our product candidates.
Our success depends in part on operating without infringing the
proprietary rights of others. It is possible that we may
infringe intellectual property rights of others without being
aware of the infringement. If another party believes that
activities with our product or one of our product candidates
infringes or misappropriates its patent, trade secrets or other
proprietary rights, it may sue us even if we or our licensors
have received patent protection that also relates to that
product or product candidate. If another party claims that we
are infringing or misappropriating its technology, we could face
a number of issues, including the following:
--
defending a lawsuit, which is very
expensive and time consuming, even if we ultimately prevail;
--
defending against an interference
proceeding in the United States Patent and Trademark Office,
which also can be very expensive and time consuming, regardless
of the outcome;
--
an adverse decision in a lawsuit
or in an interference proceeding resulting in the loss of some
or all of our rights to our intellectual property, products or
product candidates;
--
paying a large sum for damages,
including possible punitive damages, if we are found to be
infringing;
--
being prohibited from making,
using, selling, offering for sale, or importing our product
candidates or our products, if any, until we obtain a license
from the infringed party. Such a license may not be granted to
us at all or may not be granted on satisfactory terms, and, even
if we are granted a license, we may have to pay substantial
royalties or grant cross-licenses to our patents; and
--
redesigning the manufacturing
methods or the use claims of our product candidates so that they
do not infringe the other party’s proprietary rights if we
are unable to obtain a license, which, even if possible, could
require substantial additional capital, could necessitate
additional regulatory approval, and could delay
commercialization.
We are aware of one issued United States patent that
contains claims covering subject matter that, if construed
broadly, could affect our ability to develop, manufacture, and
sell our D-Serine product candidate. In addition, we are aware
of one issued United States patent that contains claims covering
subject matter that, if construed broadly, could affect our
ability to develop, manufacture, and sell our PPI-03306 product.
In addition, we are aware of issued United States patents having
claims that cover certain transdermal lisuride formulations
and/or the transdermal use of lisuride. We do not have licenses
to these patents nor do we believe that a license to these
patents is required to develop, commercialize or sell Lisuride
Transdermal in the United States as presently formulated.
However, if we change the formulation of Lisuride Transdermal to
more than double the currently expected maximum delivered dose
of lisuride, these patents could affect our ability to develop,
commercialize and sell Lisuride Transdermal. The owners of these
patents may initiate a lawsuit alleging infringement of one or
more of these patents. If they do, we may not be successful in
defending such suits. Additionally, our ability to develop,
commercialize and sell Lisuride Transdermal could be materially
adversely affected if the formulation of our product candidate
changes with respect to its components, or if we fail to obtain
rights to certain components of the present formulation of
Lisuride Transdermal. Failure to obtain such rights on
commercially reasonable terms could affect our ability to
develop, commercialize and sell Lisuride Transdermal as
presently formulated.
32
Risk factors
RISKS RELATED TO EMPLOYEES AND POTENTIAL GROWTH OF OUR
BUSINESS
We are dependent on key personnel and we must attract and
retain qualified employees, collaborators and consultants.
The success of our business is highly dependent on the principal
members of our scientific and management staff, including Melvin
Booth, our executive chairman, Kathleen Clarence-Smith, our
chief executive officer, David Cory, our president and chief
operating officer, Bill Washecka, our chief financial officer,
Christopher O’Brien, our chief medical officer, and
Benjamin Lewis, our vice president of regulatory affairs. In
particular, all of the product candidates that we have
in-licensed to date have been identified through
Dr. Clarence-Smith’s contacts within the academic and
scientific communities. The loss of the services of any of such
personnel might seriously harm our product development and
commercialization efforts. In addition, we will require
additional skilled personnel in areas such as clinical
development. Retaining and training personnel with the requisite
skills is challenging and competitive, particularly in the
Washington, DC area where we are located.
Our success will depend on our ability to attract and retain
qualified employees to help identify, acquire and develop our
potential products, execute our in-licensing and development
strategy and market and sell our products. We have programs in
place to retain personnel, including programs to create a
positive work environment and competitive compensation packages.
Because competition for employees in our field is intense,
however, we may be unable to retain our existing personnel or
attract additional qualified employees. Our success also depends
on the continued availability of outside scientific
collaborators, including collaborators at research institutions,
to perform research and develop processes to advance and augment
our product development efforts. Competition for these
collaborators is intense. We also rely on services provided by
outside consultants. Attracting and retaining qualified outside
consultants is competitive and, generally, outside consultants
can terminate their relationship with us at will. If we do not
attract and retain qualified personnel, outside consultants and
scientific collaborators, or if we experience turnover or
difficulties recruiting new employees or outside consultants,
our product candidate identification and development programs
could be delayed and we could experience difficulties in
generating sufficient revenue to maintain our business.
Our operations may be impaired unless we can successfully
manage our growth.
We expect to continue to expand our product development, sales
and marketing and administrative operations. Our net cash used
in operating activities increased by $12.4 million during
the year ended December 31, 2004, as compared to the year
ended December 31, 2003, and we increased the number of
employees from 21 on January 1, 2004 to 29 as of
March 31, 2005. We plan to substantially increase our
headcount by the end of 2005, which has placed, and is expected
to continue to place, a significant strain on our managerial,
operational and financial resources. To manage further growth,
we will be required to improve existing, and implement
additional, operational and financial systems, procedures and
controls and hire, train and manage additional employees. In
attempting to do so, we will be subject to the risks that:
--
our current and planned personnel,
systems, procedures and controls may not be adequate to support
our anticipated growth;
--
our management may not be able to
hire, train, retain, motivate and manage required
personnel; or
--
our management may not be able to
successfully identify, manage and exploit existing and potential
market opportunities.
Our failure to manage growth effectively could limit our ability
to achieve our product development and commercialization goals.
33
Risk factors
We will need to implement additional finance and accounting
systems, procedures and controls in the future as we grow our
business and organization and to satisfy new reporting
requirements.
As a public reporting company, we will need to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the Securities and Exchange Commission, including expanded
disclosures and accelerated reporting requirements. Compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 and
other requirements will increase our costs and require
additional management resources. We are currently upgrading our
existing, and implementing additional, procedures and controls
and will need to continue to do so as we grow our business and
organization and to satisfy new reporting requirements.
Additionally, we are designing and implementing a new finance
and accounting software system, in order to enhance our internal
control over financial reporting, although there can be no
guarantee that it will be successful in doing so. Compliance
with Section 404 will first apply to our annual report on
Form 10-K for our fiscal year ending December 31,2006. If we are unable to complete the required assessment as to
the adequacy of our internal control reporting or if our
independent registered public accounting firm is unable to
provide us with an unqualified report as to the effectiveness of
our internal control over financial reporting as of
December 31, 2006, investors could lose confidence in the
reliability of our internal control over financial reporting,
which could adversely affect our stock price.
RISKS RELATED TO THIS OFFERING
If our stock price is volatile, purchaser of our common stock
could incur substantial losses.
The trading price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in price in
response to various factors, many of which are beyond our
control, including:
--
actual or anticipated results of
our clinical trials;
--
delay in or failure to receive
approval for the NDA covering our lead product candidate,
tetrabenazine, or any actual or anticipated regulatory approvals
of our other product candidates or of competing products;
--
changes in laws or regulations
applicable to our products or product candidates;
--
changes in the expected or actual
timing of our development programs;
--
actual or anticipated variations
in quarterly operating results;
--
announcements of technological
innovations by us, our collaborators or our competitors;
--
introduction or announcement of
new product candidates or products by us or our competitors;
--
changes in financial estimates or
recommendations by securities analysts;
--
failure to meet or exceed expected
quarterly operating results;
--
conditions or trends in the
biotechnology and pharmaceutical industries;
--
changes in the market valuations
of similar companies;
--
announcements by us of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
--
additions or departures of key
personnel;
--
disputes or other developments
relating to proprietary rights, including patents, litigation
matters and our ability to obtain market exclusivity for our
products and product candidates;
--
termination or non-renewal of
licensing agreements;
34
Risk factors
--
the loss of a collaborator;
--
developments concerning our
collaborations;
--
trading volume of our common
stock; and
--
sales or anticipated sales of our
common stock by us or our stockholders.
In addition, the stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to operating performance. Further, there has
been particular volatility in the market prices of securities of
biotechnology and life sciences companies. These broad market
and industry factors may seriously harm the market price of our
common stock, regardless of our operating performance. In the
past, following periods of volatility in the market, or a
decline in an individual company’s stock price, securities
class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could
result in substantial costs and diversion of management’s
attention and resources, regardless of its outcome.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over our operations.
Our executive officers, directors and principal stockholders,
together with their affiliates, currently own more than 90% of
our voting stock, including shares subject to outstanding
options and warrants, and we expect that upon completion of this
offering, that same group will continue to hold at least a
majority of our outstanding voting stock. Accordingly, even
after this offering, these stockholders will likely be able to
determine the composition of our board of directors, retain the
voting power to approve all matters requiring stockholder
approval and continue to have significant influence over our
operations. This concentration of ownership could have the
effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us, which in turn could limit the market value
of our common stock.
Issuance of shares in connection with financing transactions
or under stock plans and outstanding warrants will dilute
current stockholders.
Pursuant to our 2003 Equity Incentive Plan, our management is
authorized to grant stock options and stock awards to our
employees, directors and consultants. As of March 31, 2005,
we had an aggregate of 12,500,000 shares of our common
stock reserved for issuance under our 2003 Equity Incentive
Plan, of which 9,065,500 shares are issuable on the
exercise of outstanding but unexercised option grants and
2,756,492 shares remain available for future grant.
Effective as of the closing of this offering, our 2003 Equity
Incentive Plan will be amended and restated in its entirety, and
the aggregate share reserve under the amended and restated plan
will be increased
to shares
of our common stock. Additionally, awards may be made in the
form of stock appreciation rights and restricted stock units
under the amended and restated plan, as well as stock options
and outright stock grants. Effective as of the closing of this
offering, we will also adopt a 2005 Non-Employee Directors’
Stock Plan, under which we will reserve additional shares of our
common stock for issuance to our non-employee directors. In
addition, as of March 31, 2005 we also had warrants
outstanding to purchase an aggregate of 1,412,455 shares of
our common stock. These warrants will terminate as of the
closing of this offering, unless exercised prior to that time.
Current stockholders will incur dilution upon exercise of any
outstanding stock options or warrants.
In addition, we will need to raise significant additional
capital to finance the in-licensing and clinical development of
our product candidates. If we raise additional funds by issuing
additional common stock, or securities convertible into or
exchangeable or exercisable for common stock, further dilution
to our existing stockholders will result, and new investors
could have rights superior to existing stockholders.
35
Risk factors
Future sales or anticipated sales of currently restricted
shares could cause the market price of our common stock to
decrease significantly, even if our business is performing
well.
Our current stockholders hold a substantial number of shares of
common stock that they will be able to sell in the future. Sales
of a significant number of shares of our common stock, or the
perception that these sales could occur, particularly by
affiliates, directors, executive officers or other insiders,
could materially and adversely affect the market price of our
common shares and impair our ability to raise capital through
the sale of additional equity securities.
After this
offering, shares
of common stock will be outstanding based on the number of
shares outstanding as of March 31, 2005. This includes
the shares
that we are selling in this offering. The
remaining shares,
or
approximately %
of the shares to be outstanding after this offering, are
currently restricted as a result of securities laws or lock-up
agreements. However, the underwriters can waive the provisions
of the lock-up agreements and allow the stockholders bound by
the lock-up agreements to sell their shares at any time, subject
to applicable securities laws. Taking into account the lock-up
agreements, the number of shares that will be available for sale
in the public market under the provisions of Rule 144,
144(k) and 701 will be as follows:
Number of shares
Date
eligible for sale
Comment
Immediately
Shares sold in this offering
180 days after date of this prospectus
Lock-up released; shares eligible for sale under Rules 144
and 701.
Thereafter
Restricted securities held for one year or less.
The lock-up agreements may be extended in certain circumstances.
See “Shares eligible for future sale—Lock-up
agreements” for further information.
Holders of
approximately shares
of common stock will have rights after this offering, subject to
some conditions, to require us to file registration statements
under the Securities Act of 1933, as amended, or the Securities
Act, covering their shares or to include their shares in
registration statements that we may file under the Securities
Act for ourselves or other stockholders. We also intend to
register all shares of common stock that we may issue under our
employee or director equity plans. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements discussed above.
We have implemented anti-takeover provisions that could
discourage, prevent or delay a takeover, even if the acquisition
would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation and
bylaws that will become effective upon completion of this
offering, as well as provisions of Delaware law, could make it
more difficult for a third party to acquire us, even if doing so
would benefit our stockholders. These provisions:
--
establish a classified board of
directors so that not all members of our board may be elected at
one time;
--
authorize the issuance of up to
10,000,000 shares of preferred stock that could be issued
by our board of directors without stockholder approval to
increase the number of outstanding shares and hinder a takeover
attempt;
--
limit who may call a special
meeting of stockholders;
36
Risk factors
--
prohibit stockholder action by
written consent, thereby requiring all stockholder actions to be
taken at a meeting of our stockholders; and
--
establish advance notice
requirements for nominations for election to our board of
directors or for proposing matters that can be acted upon at a
stockholder meeting.
We are subject to the Delaware anti-takeover laws regulating
corporate takeovers. These anti-takeover laws prevent a Delaware
corporation from engaging in a merger or sale of more than
10 percent of its assets with any stockholder, including
all affiliates and associates of the stockholder, who owns
15 percent or more of the corporation’s outstanding
voting stock, for three years following the date that the
stockholder acquired 15 percent or more of the
corporation’s stock unless:
--
the board of directors approved
the transaction where the stockholder acquired 15 percent
or more of the corporation’s stock;
--
after the transaction in which the
stockholder acquired 15 percent or more of the
corporation’s stock, the stockholder owned at least
85 percent of the corporation’s outstanding voting
stock, excluding shares owned by directors, officers and
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held under
the plan will be tendered in a tender or exchange offer; or
--
on or after this date, the merger
or sale is approved by the board of directors and the holders of
at least two-thirds of the outstanding voting stock that is not
owned by the stockholder.
The provisions of our governing documents and current Delaware
law may, collectively:
--
lengthen the time required for a
person or entity to acquire control of us through a proxy
contest for the election of a majority of our board of directors;
--
discourage bids for our common
stock at a premium over market price; and
--
generally deter efforts to obtain
control of us.
37
Special note regarding forward-looking statements
This prospectus, including the sections titled “Prospectus
summary,”“Risk factors,”“Management’s
discussion and analysis of financial condition and results of
operations” and “Business,” contains
forward-looking statements. Forward-looking statements convey
our current expectations or forecasts of future events. All
statements contained in this prospectus other than statements of
historical fact are forward-looking statements. Forward-looking
statements include statements regarding our future financial
position, business strategy, budgets, projected costs, plans and
objectives of management for future operations. The words
“may,”“continue,”“estimate,”“intend,”“plan,”“will,”“believe,”“project,”“expect,”“anticipate” and similar expressions may identify
forward-looking statements, but the absence of these words does
not necessarily mean that a statement is not forward-looking.
These forward-looking statements include, among other things,
statements about:
--
the expected progress of clinical
trials and other development activities involving our product
candidates;
--
the progress of our research and
development programs;
--
the in-licensing of additional
product candidates;
--
the benefits to be derived from
relationships with our current and future collaborators;
--
the timing of regulatory filings
and the expected receipt of regulatory approvals;
--
the expected mechanism of action
and the underlying safety and efficacy of our product candidates
in humans;
--
our competitors;
--
the expected benefits of our
product candidates over existing therapies;
--
the timing of, and ability to
obtain, reimbursement of our product candidates;
--
our estimates of future revenues
and profitability; and
--
our estimates regarding our
capital requirements and our need for additional financing.
Any or all of our forward-looking statements in this prospectus
may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. They may be
affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties, including the risks,
uncertainties and assumptions described in “Risk
factors.” In light of these risks, uncertainties and
assumptions, the forward-looking events and circumstances
discussed in this prospectus may not occur as contemplated, and
actual results could differ materially from those anticipated or
implied by the forward-looking statements.
These risk factors include:
--
the risk that the FDA may not
approve tetrabenazine for the treatment of chorea associated
with Huntington’s disease on the schedule we anticipate or
at all;
--
the risk that the FDA may not
clear one or more of our INDs to permit us to begin clinical
trials on one or more of our other product candidates in the
United States;
--
the risk that we may be not be
able to protect our competitive position due to the limited
patent protection on most of our product candidates;
38
Special note regarding forward-looking statements
--
the risk that we may fail to
obtain additional financing, or that we may be unable to raise
additional financing on acceptable terms;
--
the risk that the FDA may not
approve our product candidates in the time frames we announce
and expect;
--
the risk that we may not be able
to identify and acquire rights to new product candidates;
--
the risk that we may not find, or
enter into agreements with, development and commercialization
collaborators for our product candidates that address very large
markets;
--
the risk that our clinical trials
may not yield results that will enable us to obtain regulatory
approval for our product candidates;
--
the risk that our products may not
be accepted in the marketplace;
--
the risk that our current and
potential competitors may commercialize drugs that address the
indications that our product candidates target; and
--
the risk that we may not be able
to obtain favorable reimbursement from third party payors.
You should read this prospectus and the registration statement
of which this prospectus is a part completely and with the
understanding that our actual future results may be materially
different from what we expect. We qualify all of the
forward-looking statements in this prospectus by these
cautionary statements.
You should not unduly rely on these forward-looking statements,
which speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to publicly update
or revise any forward-looking statements to reflect new
information or future events or otherwise. You should, however,
review the factors and risks we describe in the reports we will
file from time to time with the SEC after the date of this
prospectus. See “Where you can find additional
information.”
39
Use of proceeds
We estimate that the net proceeds to us from the sale of
the shares of common stock
we are offering will be approximately
$ ,
assuming an initial public offering price of
$ per share, the mid point of
the estimated price range on the cover of this prospectus and
after deducting estimated underwriting discounts and commissions
and the estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we
estimate the net proceeds to us from this offering will be
approximately
$ .
We anticipate using the net proceeds from this offering as
follows:
--
approximately
$ million
to fund the completion of the development and commercial launch
in the United States of tetrabenazine for the treatment of
chorea associated with Huntington’s disease, and our
planned Phase III clinical trial of tetrabenazine for the
treatment of tardive dyskinesia;
--
approximately
$ million
to fund our planned Phase III clinical trials for the use
of Lisuride Subcutaneous and Lisuride Transdermal to treat
Parkinson’s disease;
--
approximately
$ million
to fund our planned Phase III clinical trial for the use of
Lisuride Transdermal to treat Restless Legs Syndrome;
--
approximately
$ million
to fund our planned Phase I and Phase IIb clinical trials
for the use of D-Serine to treat schizophrenia; and
--
approximately
$ million
to fund our ongoing development program in Europe to evaluate
whether PPI-03306 is effective for the treatment of sleep apnea.
We expect to use the balance of the net proceeds, together with
our available cash resources, for working capital and general
corporate purposes, including capital expenditures. We may also
use a portion of our available cash resources to acquire rights
to additional product candidates through license or
collaborative agreements. However, we have no understandings,
commitments or agreements to enter into any licensing or
collaborative agreements at this time. We expect that the net
proceeds of this offering, together with our available cash
resources, will be sufficient to support our operations for at
least the next months.
As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds from
this offering. The amounts and timing of our actual expenditures
may vary significantly from our expectations depending upon
numerous factors, including the progress and results of our
development and commercialization efforts, the progress of our
clinical trials, and our operating costs and capital
expenditures. Accordingly, we will retain the discretion to
allocate the net proceeds of this offering among the identified
uses described above, and we reserve the right to change the
allocation of the net proceeds among the uses described above as
a result of contingencies such as the progress and results of
our clinical trials and our development activities, the results
of our commercialization efforts and competitive developments.
We expect to require additional financing to complete
development of our current product candidates and to acquire and
develop future product candidates, as well as to fund our
capital expenditures and operating losses in the future.
Financing may not be available on acceptable terms, or at all,
and our failure to raise capital when needed could materially
adversely impact our growth plans and our financial condition
and results of operations. Additional equity financing may be
dilutive to the holders of our common stock and debt financing,
if available, may involve significant cash payment obligations
and covenants that restrict our ability to operate our business.
40
Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment-grade
securities.
Dividend policy
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain any future earnings to
finance the growth and development of our business and therefore
do not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be
at the discretion of our board of directors and will depend upon
our financial condition, operating results, capital
requirements, covenants in our debt instruments, and such other
factors as the board of directors deems relevant.
41
Capitalization
The following table sets forth our capitalization as of
December 31, 2004, presented:
--
on an actual basis;
--
on a pro forma basis to give
effect to the conversion of all 50,579,299 shares of our
preferred stock outstanding as of December 31, 2004 into
50,579,299 shares of our common stock, which will become
effective at the closing of this offering; and
--
on a pro forma as adjusted basis
to further reflect the sale
of shares
of our common stock we are offering, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable to us.
Series A-1 redeemable convertible preferred stock;
$0.001 par value; 10,065,999 shares authorized;
10,065,999 shares issued and outstanding on an actual basis
and no shares issued and outstanding on a pro forma and pro
forma as adjusted basis
8,246
—
Series A-2 redeemable convertible preferred stock;
$0.001 par value; 13,030,570 shares authorized;
13,030,570 shares issued and outstanding on an actual basis
and no shares issued and outstanding on a pro forma and pro
forma as adjusted basis
14,164
—
Series B redeemable convertible preferred stock;
$0.001 par value; 27,482,730 shares authorized;
27,482,730 shares issued and outstanding on an actual basis
and no shares issued and outstanding on a pro forma and pro
forma as adjusted basis
37,164
—
Stockholders’ equity (deficit):
Common stock; $0.001 par value; 80,000,000 shares
authorized on an actual and pro forma basis, and
100,000,000 shares authorized on a pro forma as adjusted
basis; 11,861,680 shares issued and outstanding on an
actual basis, 62,440,979 shares issued and outstanding on a
pro forma basis
and shares
issued and outstanding on a pro forma as adjusted basis
This note was issued in connection with the purchase of our
common stock in December 2002. The note receivable from officer,
together with all accumulated interest thereon, was repaid in
full as of March 31, 2005.
The table above should be read in conjunction with our
consolidated financial statements and the related notes
appearing elsewhere in this prospectus. This table is based on
11,861,680 shares of our common stock outstanding as of
December 31, 2004 and excludes:
--
9,495,958 shares of our
common stock issuable upon exercise of options outstanding as of
December 31, 2004, with a weighted average exercise price
of $0.28 per share, of which options to
purchase 2,590,486 shares were exercisable as of that
date, with a weighted average exercise price of $0.20 per
share;
--
131,042 shares of our common
stock, representing the unvested portion of stock options that
had been exercised pursuant to early exercise provisions, with a
weighted average exercise price of $0.20 per share;
--
1,970,067 shares of our
common stock issuable upon exercise of warrants outstanding as
of December 31, 2004, with a weighted average exercise
price of $0.16 per share, all of which expire at the
closing of this offering if unexercised; and
--
2,538,533 shares of our
common stock reserved for future issuance under our 2003 Equity
Incentive Plan as of December 31, 2004.
43
Dilution
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the public offering
price per share of our common stock and the pro forma as
adjusted net tangible book value per share of our common stock
after this offering.
As of December 31, 2004, we had a net tangible book value
of $(29.1) million, or $(2.46) per share of common
stock, not taking into account the conversion of our outstanding
preferred stock into common stock. Net tangible book value per
share is equal to our total tangible assets less total
liabilities, divided by the number of shares of our outstanding
common stock.
After giving effect to the conversion of all of our preferred
stock and the sale
of shares
of common stock offered by this prospectus at an assumed initial
public offering price of
$ per
share, the midpoint of the expected price range shown on the
cover page of this prospectus, and after deducting the estimated
underwriting discounts and commissions and our estimated
offering expenses, our pro forma as adjusted net tangible book
value as of December 31, 2004 would have been approximately
$ million,
or approximately
$ per
pro forma share of common stock. This represents an immediate
dilution of
$ per
share to new investors in this offering. If the initial public
offering price is higher or lower than
$ per
share, the dilution to new stockholders will be higher or lower,
respectively. The following table illustrates this per share
dilution:
Assumed initial public offering price per share
$
Historical net tangible book value per share as of
December 31, 2004
$
(2.46
)
Pro forma increase in net tangible book value per share
attributable to conversion of preferred stock outstanding at
December 31, 2004
0.49
Pro forma increase per share attributable to new investors
Pro forma as adjusted net tangible book value per share after
this offering
Pro forma dilution per share to new investors
$
If the underwriters exercise their over-allotment option in
full, pro forma as adjusted net tangible book value will
increase to per
share, representing an increase to existing holders
of per share,
and there will be immediate dilution
of per share to
new investors.
The following table summarizes, on a pro forma as adjusted basis
as of December 31, 2004, the differences between existing
stockholders and new investors with respect to:
--
the number of shares of common
stock purchased from us, assuming the conversion of all
outstanding shares of preferred stock into common stock;
--
the total consideration paid to
us; and
--
the average price per share
investors pay when they buy common stock in this offering,
before deduction of estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
44
Dilution
The calculation in this table with respect to shares to be
purchased by new investors in this offering reflects an assumed
initial public offering price of
$ per
share.
Shares purchased
Total consideration
Average price
Number
Percent
Amount
Percent
per share
Existing stockholders
62,440,979
%
$
61,825,235
%
$
0.99
New investors
Total
100.0
%
$
100.0
%
The foregoing discussion and tables assume no exercise of the
underwriters’ over-allotment option or of any outstanding
stock options or warrants after December 31, 2004.
If the underwriters exercise their over-allotment option in
full, the following will occur:
--
the pro forma as adjusted
percentage of shares of our common stock held by existing
stockholders will decrease to
approximately %
of the total pro forma as adjusted number of shares of our
common stock outstanding after this offering; and
--
the pro forma as adjusted
number of shares of our common stock held by new public
investors will increase
to ,
or
approximately %
of the total pro forma as adjusted number of shares of our
common stock outstanding after this offering.
The tables and calculations above are based on
11,861,680 shares of our common stock outstanding as of
December 31, 2004 and exclude:
--
9,495,958 shares of our
common stock issuable upon exercise of options outstanding as of
December 31, 2004, with a weighted average exercise price
of $0.28 per share, of which options to
purchase 2,590,486 shares were exercisable as of that
date, with a weighted average exercise price of $0.20 per
share;
--
131,042 shares of our common
stock, representing the unvested portion of stock options that
had been exercised pursuant to early exercise provisions as of
December 31, 2004, with a weighted average exercise price
of $0.20 per share;
--
1,970,067 shares of our
common stock issuable upon exercise of warrants outstanding as
of December 31, 2004, with a weighted average exercise
price of $0.16 per share, all of which expire at the
closing of this offering if unexercised; and
--
2,538,533 shares of our
common stock reserved for future issuance under our 2003 Equity
Incentive Plan as of December 31, 2004.
If all of our outstanding options and warrants as of
December 31, 2004 were exercised, the pro forma as
adjusted net tangible book value per share after this
offering would be
$ per
share, representing an increase to existing holders of
$ per
share, and there will be an immediate dilution of
$ per
share to new investors.
45
Selected consolidated financial data
We were formed on November 1, 2002 and commenced operations
on December 13, 2002 after executing an Asset Purchase and
Subscription Agreement with Prestwick Scientific Capital, Inc.
The selected consolidated financial data table sets forth
certain financial data of Prestwick Scientific Capital, Inc.,
which includes expenses incurred prior to our inception and
directly attributable to the assets that we acquired. The
selected consolidated financial data table sets forth Prestwick
Scientific Capital, Inc.’s “Statement of direct
operating expenses data related to certain assets of Prestwick
Scientific Capital, Inc.” for the years ended
December 31, 2000 and 2001 and for the period from
January 1, 2002 through October 31, 2002 and sets
forth our “Consolidated statement of operations data”
and “Consolidated balance sheet data” as of
December 31, 2003 and 2004 and for the period from
November 1, 2002 (inception) through December 31, 2002
and for the years ended December 31, 2003 and 2004. The
“Statement of direct operating expenses data related to
certain assets of Prestwick Scientific Capital, Inc.” for
the period from January 1, 2002 through October 31,2002 and our “Consolidated statement of operations
data” and “Consolidated balance sheet data” as of
December 31, 2003 and 2004 and for the period from
November 1, 2002 (inception) through December 31,2002 and for the years ended December 31, 2003 and 2004 are
derived from audited financial statements included elsewhere in
this prospectus. The “Statement of direct operating
expenses data related to certain assets of Prestwick Scientific
Capital, Inc.” for the years ended December 31, 2000
and 2001 are derived from unaudited financial statements not
included in this prospectus. The following selected consolidated
financial data should be read in conjunction with
“Management’s discussion and analysis of financial
condition and results of operations,” our consolidated
financial statements, and the statement of direct operating
expenses data related to certain assets of Prestwick Scientific
Capital, Inc. and the related notes appearing elsewhere in this
prospectus.
Accretion of redeemable convertible preferred stock to
redemptive value
—
(816
)
(2,311
)
Net loss attributable to common stockholders
$
(1,543
)
$
(11,359
)
$
(22,352
)
Net loss per common share, basic and diluted:
Historical
$
(4.63
)
$
(1.57
)
$
(2.81
)
Pro forma
(unaudited)(2)
$
—
$
—
$
(0.60
)
Shares used to compute basic and diluted net loss per
common share:
Historical
333,562
7,250,000
7,958,668
Pro forma
(unaudited)(2)
—
—
33,345,465
(1)
Consolidated financial data for the period from
November 1, 2002 (our inception) through December 31,2004 reflect the fair value of assets purchased in connection
with the Asset Purchase Agreement executed on December 13,2002. The comparability of the operating results for the periods
presented is affected by the purchase accounting of assets
acquired. The Statement of direct operating expenses data
related to certain assets of Prestwick Scientific Capital, Inc.
for the pre-acquisition periods prior to October 31, 2002
include expenses directly attributable to the assets we acquired
and is presented for the periods prior to October 31, 2002
for comparative purposes.
We have not presented balance sheet data of Prestwick
Scientific Capital as of December 31, 2000 and 2001, as we
believe that the balance sheet data would be meaningless.
Prestwick Scientific Capital had not consummated any debt or
equity financings to further the development and
commercialization of the licensed product candidates and had not
recorded any assets in
47
Selected consolidated financial data
connection with the product candidates sold to us. Prestwick
Scientific Capital, Inc. had held the rights to licensed product
candidates and had incurred legal costs related to patents, but
had not engaged in any material development activities with
respect to those product candidates.
(2)
The pro forma net loss per common share and the shares used
in computing pro forma net loss per common share reflect the
conversion of all outstanding shares of our redeemable
convertible preferred stock as of January 1, 2004, or the
issuance date, whichever is later. Immediately prior to the
closing of our initial public offering, all of our then
outstanding shares of preferred stock will automatically convert
into 50,579,299 shares of common stock.
As of December 31,
Consolidated balance sheet data of
Prestwick Pharmaceuticals, Inc.:
2002
2003
2004
(in thousands)
Cash and cash equivalents
$1,997
$15,048
$30,924
Working capital
1,721
12,270
30,047
Total assets
2,021
15,293
32,850
Convertible promissory
notes(1)
1,960
—
—
Other long-term liabilities
—
21
15
Redeemable convertible preferred stock
—
23,696
59,574
Accumulated deficit
(1,543
)
(12,087
)
(32,128
)
Total stockholders’ equity (deficit)
(162
)
(11,312
)
(29,135
)
(1)
On February 26, 2003, the convertible notes and accrued
interest thereon were converted into 2,004,861 shares of
common stock.
48
Management’s discussion and analysis of financial condition
and results of operations
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes to those
financial statements appearing elsewhere in this prospectus.
This discussion contains forward-looking statements that involve
significant risks and uncertainties. As a result of many
factors, such as those set forth under “Risk factors”
and elsewhere in this prospectus, our actual results may differ
materially from those anticipated in these forward-looking
statements.
OVERVIEW
We are a product-focused specialty pharmaceutical company
engaged in the development and commercialization of small
molecule drugs with high commercial potential and relatively low
development risk that target chronic diseases of the central
nervous system, or CNS. Our strategy is to identify, acquire,
develop and commercialize product candidates that address CNS
disorders with significant unmet medical need. We also intend to
develop and market both new and enhanced delivery forms and
additional therapeutic applications of some of our product
candidates to increase their commercial potential. To date, we
have in-licensed rights relating to five product candidates, one
of which, tetrabenazine, we currently market in Canada and
expect to receive approval to market in the United States. Based
on our fast track designation, we could receive FDA approval to
market tetrabenazine in the United States as early as the first
quarter of 2006.
We were formed on November 1, 2002 and commenced operations
in December 2002 upon executing an asset purchase and
subscription agreement with Prestwick Scientific Capital, Inc.,
and its parent company, Prestwick Companies, Inc. Pursuant to
the asset purchase agreement, we acquired the rights, title and
interest in three product candidates related to CNS disorders,
assumed rights and obligations under three license agreements
and two foreign patent applications, and acquired trademarks
related to licensed product candidates, all in exchange for
6,000,000 shares of our common stock. Since beginning
operations, we have in-licensed rights to two additional product
candidates for the treatment of CNS disorders.
For the period from January 1, 2002 to October 31,2002, we have presented a statement of direct operating expenses
of Prestwick Scientific Capital, which specifically includes
expenses directly attributable to the licensed product
candidates that we acquired pursuant to the asset purchase
agreement. This statement of direct operating expenses is
presented only for comparative purposes and is not necessarily
indicative of the expenses that would have been incurred if
these assets had been acquired and held by a stand-alone
business during the periods presented.
Since our inception, we have incurred significant losses and, as
of December 31, 2004, we had an accumulated deficit of
$(32.1) million. We have not yet achieved profitability and
anticipate that we will continue to incur net losses for the
foreseeable future. We expect that our research and development,
sales and marketing and general and administrative expenses will
continue to grow and, as a result, we will need to generate
significant net revenues to achieve profitability.
In April 2004, we entered into an agreement with Cambridge
Laboratories Limited, or Cambridge, under which we received
exclusive rights to import, distribute and market tetrabenazine
tablets, under the brand name Nitoman, in Canada. We re-launched
Nitoman in Canada during September 2004. While sales of Nitoman
to date have been modest, acquiring commercial rights to this
product in Canada has offered us the opportunity to build our
sales and marketing infrastructure and gain additional expertise
in the hyperkinetic movement disorder market in advance of our
anticipated
49
Management’s discussion and analysis of financial
condition and results of operations
United States launch of tetrabenazine. We expect to submit an
NDA to the FDA in the second quarter of 2005 for the indication
of chorea associated with Huntington’s disease. The FDA has
granted tetrabenazine fast track designation for chorea
associated with Huntington’s disease and, based on our fast
track designation, we could receive FDA approval to market this
product in the United States as early as the first quarter of
2006, but approval may be delayed or not received.
In 2004, we sold Nitoman at a sales price equivalent to our cost
of the product. The cost of the product is based on the per unit
cost plus shipping costs and a warehouse and inventory handling
fee. We have recently announced a pricing increase for Nitoman
in Canada in an effort to increase revenues from Nitoman.
However, this price increase, or future anticipated price
increases, may not be successful. We may only be able to realize
a price increase on Nitoman in those provinces of Canada whose
government agrees to the increase. To date, the province of
Alberta has approved the price increase. However, one province,
Quebec, has refused to implement newly announced price increases
on pharmaceuticals, and other provinces may refuse to do so as
well. As a result, we believe that this initiative in Canada
could lead to only modest increases in revenue from Nitoman from
our recently announced price increase.
Under our Canadian agreement with Cambridge, we are required to
meet certain minimum order and sales quantities over the term of
the agreement. In the first year of the contract, we are
obligated to pay a pre-specified price per unit for a specified
threshold of units, and for quantities in excess of that
threshold, we are charged the greater of 50% of the
pre-specified price per unit or 50% of net sales per unit. A
lower threshold applies to all subsequent years. As of
December 31, 2004, we had purchased $1.7 million of
inventory, which exceeded our minimum order quantity for the
first year of the contract, which began on April 26, 2004.
As of December 31, 2004, we had sold $0.5 million of
inventory toward our minimum sales quantity for the first year
of the contract which began on April 26, 2004. Under
certain conditions, if we do not meet the minimum quantity
requirements for any two consecutive years, Cambridge can
terminate the agreement. Under our United States agreement with
Cambridge for tetrabenazine, we will also be required to meet
certain minimum order and sales quantity requirements. These
minimum requirements would extend beyond any period of marketing
exclusivity we may have for tetrabenazine in the United States
and may automatically increase substantially and repeatedly.
In connection with our commercial launch of Nitoman in Canada,
we have substantially increased the size of our Canadian sales
and marketing organization and our corporate sales team and we
expect to devote significant resources both to obtaining
approval for tetrabenazine in the United States and to
continuing the clinical trials and development of our other
existing product candidates. Additionally, we have recently
begun distributing Nitoman in Canada through Phase 4
Health, a Canadian specialty pharmacy, and we intend to begin
distributing Nitoman in Canada exclusively through Phase 4
Health three months before our anticipated commercial launch of
tetrabenazine in the United States. We also intend to distribute
tetrabenazine in the United States through specialty pharmacy
distribution.
We intend to continue to acquire or in-license rights to product
candidates that have the potential to satisfy significant unmet
medical needs and provide us with a period of regulatory or
geographic market exclusivity. We will continue to seek product
candidates that have been tested in humans, that have
established safety profiles and, as a result, that we believe
will require relatively modest expense to determine their
commercial potential. Nevertheless, we expect to incur
significant expenses in the in-licensing and development of
these future product candidates.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and
results of operations set forth below are based on our
consolidated financial statements, which have been prepared in
accordance with United
50
Management’s discussion and analysis of financial
condition and results of operations
States generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, we
evaluate our estimates and judgments, including those described
below. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances. These estimates and assumptions form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our
significant judgments and estimates used in the preparation of
our financial statements.
Revenue recognition
We sell Nitoman to distributors and, to a limited extent,
directly to hospitals and retail pharmacies in Canada. We
recognize revenue in accordance with Staff Accounting
Bulletin No. 104, whereby revenue is not recognized
until it is realized or realizable and earned. We recognize
revenues from product sales when the product has been delivered
to the customer, the price is fixed and determinable,
collectibility is reasonably assured and persuasive evidence of
an arrangement exists. For sales of Nitoman in Canada, revenues
are recognized upon receipt of the product by the customer, as
the terms of the sale require that title pass to the customer
upon receipt of the product, assuming other revenue recognition
criteria have been met. Our ability to transfer title of the
product may be affected by our ability to obtain title to the
product, which only occurs upon payment for the inventory to
Cambridge. In the future we expect to distribute Nitoman in
Canada, and once approved by the FDA, tetrabenazine in the
United States, exclusively through specialty pharmacies at
negotiated prices, that will be net of certain third party
allowances, rebates and discounts. We expect to recognize net
revenues from product sales when the product has been delivered
to the specialty pharmacies, the price is fixed and
determinable, collectibility is reasonably assured and
persuasive evidence of an arrangement exists.
We report revenues net of allowances for chargebacks from
distributors, product returns, rebates, and early pay discounts.
Significant judgment is required to determine such allowances.
This determination is based on historical data, industry
information, and information from customers. If actual results
differ from our estimates, we adjust the allowances at the time
the differences become known.
Cost of revenues
Cost of revenues reflects the cost of Nitoman, including any
royalties due on the sale of the product, plus shipping costs
and the logistics costs related to selling the product,
including warehousing and inventory handling. Under our Canadian
agreement with Cambridge, we are required to purchase certain
minimum quantities of Nitoman over the next five years. In the
first year of the contract, we are obligated to pay a
pre-specified price per unit for a specified threshold of units,
and for quantities in excess of that threshold, we are charged
the greater of 50% of the pre-specified price per unit or 50% of
net sales per unit. The threshold will be reduced in subsequent
years. As of December 31, 2004, we had purchased
$1.7 million of inventory, which exceeded our minimum order
quantity for the first year of the contract which began on
April 26, 2004. As of December 31, 2004, we had sold
$0.5 million of inventory, toward our minimum sales
quantity for the first year of the contract which began on
April 26, 2004. Under certain conditions, if we do not meet
the minimum quantity requirements, Cambridge can terminate the
agreement.
We are required to perform an accounting of net sales at the end
of each month in which we purchase inventory units in excess of
the applicable threshold. Our accounting will include a
determination of the total sales of Nitoman based on the gross
selling price and net of certain allowances, returns, and
discounts, as set forth in the Cambridge agreement. Once we have
surpassed the applicable threshold,
51
Management’s discussion and analysis of financial
condition and results of operations
we will compare, on a per unit basis, 50% of the monthly net
sales of Nitoman to 50% of the pre-specified price per unit and
remit the difference, if any, to Cambridge.
Our United States agreement with Cambridge to purchase and sell
tetrabenazine contains similar terms and requirements, related
to minimum sales and purchase quantities, and will require an
accounting of net sales, as those described above.
In the future, we may incur and pay royalties to licensors
pursuant to our license agreements. The royalties vary between
low single digit and mid-double digit percentages and are
payable based upon sales of products.
Inventory
We are required by contract to purchase all of our Nitoman
product from Cambridge and we will be obligated to purchase all
of our tetrabenazine from Cambridge. Title to the inventory
transfers to us upon payment. Inventory is stated at the lower
of cost or market, as determined using the first-in, first-out
method. We periodically review inventory, and items considered
outdated or obsolete are reduced to their estimated net
realizable value. To date, we have not experienced any inventory
write-downs or recorded any obsolescence reserves.
Accrued expenses
As part of the process of preparing financial statements, we are
required to estimate accrued expenses. This process involves
identifying services that have been performed on our behalf and
estimating the level of service performed and the associated
cost incurred for such service where we have not yet been
invoiced or otherwise notified of actual cost. We make these
estimates as of each balance sheet date in our consolidated
financial statements. Examples of estimated accrued expenses
include:
--
fees payable to contract research
organizations in conjunction with clinical trials; and
--
professional service fees.
In accruing service fees, we estimate the time period over which
services were provided and the level of effort in each period.
If the actual timing of the provision of services or the level
of effort varies from the estimate, we will adjust the accrual
accordingly. The majority of our professional service providers
invoice us monthly in arrears for services performed, and our
contract research organizations invoice us quarterly or
semiannually for services performed. In the event that we do not
identify costs that have begun to be incurred or we
underestimate or overestimate the level of services performed or
the costs of such services, our actual expenses could differ
from such estimates. The date on which some services commence,
the level of services performed on or before a given date and
the cost of such services are often subjective determinations.
We make judgments based upon the facts and circumstances known
to us.
Research and development expenses
We expense research and development costs as incurred. Research
and development expenses include contractor fees, principally
related to contract research organizations assisting us with our
clinical trials, as well as other consultants who are experts in
the CNS disorder field, legal expenses related to our patents,
patent applications and licensing and other collaborative
agreements, milestone payments to licensors for product
candidates in development, and salaries and related personnel
costs of employees engaged in product development.
52
Management’s discussion and analysis of financial
condition and results of operations
Stock-based compensation
We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123R,
Share-Based Payment, or SFAS 123R, which was issued
in December 2004 by the Financial Accounting Standards Board. We
have adopted SFAS 123R for all periods presented. As
permitted by SFAS 123R, we recognize all share-based
payments to employees, including grants of employee stock
options, in the consolidated statements of operations based on
their fair values determined using a Black-Scholes valuation
model, which requires us to make certain assumptions, including
volatility and the fair value of the underlying common stock. We
have assumed a volatility of 80% based on comparable guideline
companies and management judgment. Given the absence of an
active market for our common stock, our board of directors has
estimated the fair value of our common stock on the grant date
of the stock options based on several factors, including
progress and milestones achieved in our business and sales of
our preferred stock. Should our input assumptions for the
Black-Scholes valuation model change, the fair value of options
issued to our employees will change. Additionally, pursuant to
SFAS 123R, we have estimated the timing and probability of
vesting of certain of our options that vest based on the
achievement of performance criteria and have estimated the
amount of forfeitures based on employee separations. Should
actual events differ from those estimates, we will record
cumulative adjustments to reflect the actual vesting and
forfeitures in our consolidated financial statements. We
recorded stock-based compensation totaling $206,304 and $342,010
for the years ended December 31, 2003 and 2004,
respectively, in connection with options issued to our employees.
We account for equity instruments issued to non-employees in
accordance with SFAS 123R and Emerging Issues Task Force
Issue No. 96-18, Accounting for Equity Instruments that
are Issued to other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services. Accordingly, the
estimated fair value of the equity instrument is recorded on the
earlier of the performance commitment date or the date the
required services are completed. We estimate the fair value of
equity instruments issued to non-employees using the
Black-Scholes valuation model, which requires us to make certain
assumptions, including volatility and the fair value of the
underlying common stock. We have assumed a volatility of 80%
based on comparable guideline companies and management judgment.
Given the absence of an active market for our common stock, our
board of directors has estimated the fair value of our common
stock on the grant date of the stock options based on several
factors, including progress and milestones achieved in our
business and sales of our preferred stock. The measurement of
stock-based compensation is subject to periodic adjustment as
the underlying equity instruments vest. Should our input
assumptions for the Black-Scholes valuation model, such as
volatility or fair value of the underlying common stock, change,
the fair value of options to our non-employee consultants will
change. We recorded stock-based compensation expense totaling
$20,538 for the year ended December 31, 2004 in connection
with stock options to non-employees.
Accounting for income taxes
We record the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and
amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards.
We have recorded a full valuation allowance to reduce our
deferred tax assets as, based on available objective evidence,
it is more likely than not that the deferred tax asset will not
be realized. In the event that we determine that we will be able
to realize our deferred tax assets in the future, an adjustment
to the valuation allowance would increase net income in the
period the determination is made.
As of December 31, 2004, we had net operating loss
carryforwards of approximately $27 million and research and
development credit carryforwards of approximately
$1 million for income tax purposes, which begin to expire
in the year 2022. The future utilization of our net operating
loss carryforwards
53
Management’s discussion and analysis of financial
condition and results of operations
may be limited based upon changes in ownership, including
changes resulting from this offering, pursuant to regulations
promulgated under the Internal Revenue Code.
The following table sets forth the results of our operations for
the years ended December 31, 2003 and 2004. The results of
operations for the year ended December 31, 2002 combines
Prestwick Scientific Capital’s statement of direct
operating expenses related to certain assets for the period from
January 1, 2002 through October 31, 2002 and our
statement of operations for the period from November 1,2002 (our inception) through December 31, 2002.
Net revenues totaled $0.5 million for the year ended
December 31, 2004, as compared to $0 for the years ended
December 31, 2003 and 2002. All of the 2004 revenues were
derived from sales of Nitoman to wholesale distributors and, to
a lesser extent, retail pharmacies and hospitals located in
Canada, all of which were recorded in the fourth quarter of 2004
following our commercial launch of Nitoman in September 2004.
Revenues are recorded net of an early pay discount of 2% if paid
within 30 days, a standard practice in Canada, as well as
net of third party payor allowances, returns, and rebates. Our
net revenues for the year ending December 31, 2005 will
include a full year of revenues from sales of Nitoman and, as a
result, we expect them to be substantially higher than net
revenues for the year ended December 31, 2004.
Cost of revenues
Cost of revenues for the year ended December 31, 2004
totaled $0.5 million, as compared to $0 for the years ended
December 31, 2003 and 2002. Cost of revenues reflect the
cost of Nitoman, including
54
Management’s discussion and analysis of financial
condition and results of operations
royalties, plus shipping costs and the logistics costs related
to selling our product, including warehouse and inventory
handling. The revenues we received on sales of Nitoman during
the year ended December 31, 2004 were less than our costs
associated with having it manufactured and sold and, as a
result, our gross margin for the year ended December 31,2004 was (2.1%), as compared to 0% for 2003 and 2002. We have
recently announced a pricing increase for Nitoman in Canada
which we expect to increase revenues modestly and result in
positive gross margins in future periods.
Research and development expenses
Research and development expenses increased from
$0.6 million in combined 2002, to $7.0 million in
2003, and to $11.7 million in 2004. These expenses consist
primarily of salaries and benefits, contractor fees, principally
related to contract research organizations assisting us with our
clinical trials as well as other consultants who are experts in
the CNS disorder field, legal expenses related to our patents,
patent applications and licensing and other collaborative
agreements, and milestone payments to licensors for product
candidates in development. The increases in these expenses
resulted principally from milestone payments made pursuant to
our license agreements and contracting fees related to increases
in clinical trial activities to support the development of our
product candidates. Under our license agreements, we are
responsible for the remaining development, clinical trial and
regulatory costs for all of our product candidates. We
anticipate that our research and development expenses will
increase significantly with the continuation of existing
clinical trials, the initiation of new clinical trials and the
resulting manufacturing costs associated with our clinical
trials. Additionally, we are continuing to develop additional
applications and uses for our licensed technology to potentially
treat other disorders of the CNS and seeking additional product
candidates that meet our criteria for in-licensing.
We have increased our staffing significantly over the past two
years to support the regulatory and development activities for
our product candidates. Of the $4.7 million increase in
research and development expenses in 2004, $0.5 million was
due to increased salaries and benefits expenses and other
non-product related costs. In 2004, we incurred
$7.9 million in research and development expenses primarily
related to managing and monitoring the progress of our product
candidates undergoing clinical trials, analyzing data from
previously completed studies, and pursuing regulatory
authorizations to sell our product candidates. This represented
an increase of $2.7 million over our research and
development expenses related to clinical trial activities
incurred during 2003. In 2004, we incurred $1.8 million in
milestone license payments to licensors upon the achievement of
certain milestones in our clinical trials. This represented an
increase of $1.5 million over the amount expensed in 2003
related to milestone license payments.
Of the $6.4 million increase in research and development
expenses incurred during 2003 over 2002, $0.9 million
resulted from increased salaries and benefits expenses and other
non-product related costs. In 2003, we incurred
$5.2 million in research and development expenses including
costs of clinical trials as well other consultants and experts,
which represented an increase of $4.8 million over 2002. In
2003, we incurred $0.4 million in milestone license
payments to NeuroBiotec GmbH, or NeuroBiotec, an increase of
$0.4 million over the amount spent in 2002. The increase
resulted from the achievement of certain milestones related to
progress in our clinical trials of lisuride. In 2003, we
incurred $0.4 million in legal fees related to patents and
patent applications, or an increase of $0.3 million over
the amount spent in 2002 on legal fees.
The following table lists our current product candidates in
development and the related research and development expenses
incurred during the period indicated. The non-specific
development includes facilities and personnel costs that are not
allocated to a particular identified product candidate. Our
management reviews the status of each of these product
candidates in development on a regular basis and approves
continued activity based on clinical results and other factors.
Due to the significant risks
55
Management’s discussion and analysis of financial
condition and results of operations
and uncertainties inherent in the clinical development and
regulatory approval processes, we cannot reliably estimate the
cost to complete projects in development.
Year ended December 31,
Research and development expenses
Combined 2002
2003
2004
Product candidate
(in thousands)
Tetrabenazine
$
405
$5,878
$7,331
Lisuride Subcutaneous
—
515
1,291
Lisuride Transdermal
64
118
2,318
D-Serine
132
426
453
PPI-03306
18
25
80
All other
8
9
206
Total
$
627
$6,971
$11,679
Acquired in-process research and development expenses
We did not incur any charges for acquired in-process research
and development expenses during 2003 or 2004, compared to a
charge of $1.1 million for acquired in-process research and
development expenses during combined 2002. This charge
represents the portion of the purchase price paid in connection
with our asset purchase agreement allocable to research and
development activities that had not demonstrated technological
feasibility and had no foreseeable alternative future uses.
Additionally, all of the acquired licensed product candidates
required significant regulatory approvals prior to
commercialization and sale.
Pursuant to our asset purchase agreement, we issued an aggregate
of 6,000,000 shares of our common stock in consideration
for the assets we acquired. In connection with this purchase, we
obtained an independent appraisal to objectively determine the
fair value of our common stock. The independent appraisal of
$0.19 per share was determined using asset-based and
transactions-based valuation methodologies. Additionally, the
independent appraisal allocated the purchase price for the
assets as follows: $0.1 million to property and equipment
and $1.1 million to acquired in-process research and
development expenses.
Sales and marketing expenses
Sales and marketing expenses increased from $0 in combined 2002,
to $1.2 million in 2003, and to $2.6 million in 2004.
Sales and marketing expenses include salaries and benefits for
sales and marketing personnel, advertising and promotional
programs, conferences and shows and professional education
programs.
Sales and marketing expenses totaled $2.6 million for 2004,
an increase of $1.4 million over 2003. Following our
acquisition of the rights to import, distribute and market
Nitoman in Canada in 2004, we began establishing our sales
organization in Canada. We also began developing our corporate
sales infrastructure in the United States, as well as expanding
our marketing staffing to support the commercialization of
Nitoman in Canada and tetrabenazine in the United States when
and if it is approved by the FDA. This resulted in a
$0.7 million increase in payroll and related expenses,
including salaries, benefits and travel, for the year ended
December 2004 over 2003. Significant product marketing costs,
totaling $1.4 million, were incurred to commercially launch
Nitoman in Canada in 2004, resulting in an increase of
$0.7 million of product marketing costs in 2003.
Sales and marketing expenses increased $1.2 million from $0
in combined 2002 to $1.2 million in 2003. This increase
reflects the incurrence of $0.5 million in payroll and
related expenses and
56
Management’s discussion and analysis of financial
condition and results of operations
$0.7 million in product marketing costs as we began to
establish our sales organizations in the United States in 2003.
We expect sales and marketing expenses to continue to increase
in future years as we plan to expand our sales forces in Canada
and the United States to support the potential commercial launch
of product candidates currently in development. While we expect
the absolute dollar amount of sales and marketing expenses to
increase, we expect these expenses as a percentage of net
revenues to decline as our sales volume increases.
General and administrative expenses
General and administrative expenses increased from
$0.3 million in combined 2002, to $2.4 million in
2003, and to $4.4 million in 2004. General and
administrative expenses include salaries and benefits for
corporate staff, legal fees, tax and auditing services, and
corporate facility and insurance costs.
General and administrative expenses totaled $4.4 million
for the year ended December 31, 2004, an increase of
$2.0 million over 2003. The increase in general and
administrative expenses in 2004 was due primarily to increased
salaries, benefits and travel costs resulting from personnel
hired to expand our corporate infrastructure and to support the
anticipated additional responsibilities of becoming a public
company, including the hiring of our chief financial officer and
additional accounting personnel. Of the $2.0 million
increase, $0.2 million relates to facility and depreciation
expenses, $0.4 million to legal and other professional
fees, $1.2 million to corporate staffing to support our
business growth, and $0.2 million to product liability and
directors and officers insurance costs and other. During the
years ended December 31, 2003 and 2004, we incurred
$0.2 million and $0.2 million, respectively, in rental
expense to a related party, Prestwick Scientific Capital, Inc.,
from which we lease a portion of our principal executive offices.
General and administrative expenses increased by
$2.1 million from $0.3 million in combined 2002 to
$2.4 million in 2003. Of this increase, $1.4 million
relates to increased personnel-related costs, $0.2 million
relates to increased facility and depreciation costs, and
$0.5 million relates to increased tax, audit, legal,
insurance and other costs. This growth in expenses resulted from
increased corporate activities to support the licensing of our
product candidates and the establishment of our commercial and
corporate infrastructure.
We expect general and administrative expenses to continue to
increase in future years as we build our corporate
infrastructure to support the potential commercial launch of
product candidates currently in development. While we expect the
absolute dollar amount of general and administrative expenses to
increase, we expect these expenses as a percentage of net
revenues to decline as our sales volume increases.
Other income (expense), net
Other income (expense), net, totaled ($1.3) million for the
year ended December 31, 2004, a decrease of
$1.3 million from $0 in 2003 and 2002. This change is due
to $0.4 million of interest expense related to the
beneficial conversion feature on convertible notes issued and
converted in 2004, $0.4 million of amortized deferred
issuance costs primarily resulting from the fair value of
warrants issued in connection with these convertible notes,
$0.4 million of interest expense based on a stated interest
rate of 12% on these convertible notes, which required that we
pay a minimum of six months of interest, and $0.1 million
related to foreign currency transaction losses.
57
Management’s discussion and analysis of financial
condition and results of operations
Income tax expense
We did not incur any income tax expense during 2002, 2003, or
2004.
LIQUIDITY AND CAPITAL RESOURCES
To date, our operations have been funded primarily with proceeds
from the sale of equity and the issuance of convertible notes.
Net proceeds from our preferred stock sales since inception
totaled $48.7 million and the issuance of convertible notes
since inception provided us with net proceeds of
$10.1 million.
Cash and cash equivalents increased from $15.0 million at
December 31, 2003 to $30.9 million at
December 31, 2004. This $15.9 million increase is due
primarily to cash provided by our issuance of convertible notes
of $8.1 million, our issuance of common stock for
$0.4 million and our preferred stock sales of
$27.8 million, offset by cash used to fund operations of
$20.1 million and net cash of $0.3 million used to
fund property and equipment. Cash and cash equivalents increased
from $2.0 million at December 31, 2002 to
$15.0 million at December 31, 2003. This increase in
cash is primarily due to the receipt of the net proceeds from
our sales of preferred stock of $20.8 million, partially
offset by cash used to fund operations of $7.8 million.
We expect that our cash on hand at December 31, 2004 along
with cash generated from expected product sales, together with
the estimated net proceeds of our initial public offering, will
be adequate to fund our operations for at least the
next months. In the event
that we make additional license acquisitions, we expect that we
may need to raise additional funds sooner. Insufficient funds
may cause us to delay, reduce the scope of, or eliminate one or
more of our planned development or commercialization activities.
Our future capital needs and the adequacy of our available funds
will depend on many factors, including the effectiveness of our
sales and marketing activities, the cost of clinical trials, the
progress of product candidates in development, requirements to
make milestone payments, other actions needed to obtain
regulatory approval of our product candidates, and the timing
and cost of any product candidate acquisitions. If additional
funds are required, we may raise such funds from time to time
through public or private sales of equity or debt securities or
through borrowings from a bank or other credit source. Financing
may not be available on acceptable terms, or at all, and our
failure to raise capital when needed could materially adversely
impact our growth plans and our financial condition and results
of operations. Additional equity financing may be dilutive to
the holders of our common stock and debt financing, if
available, may involve significant cash payment obligations and
covenants that restrict our ability to operate our business.
Contractual obligations
The following table summarizes our long-term contractual
obligations as of December 31, 2004, including contractual
obligations pursuant to our supplier agreement with Cambridge
and lease obligations.
Payments due in
2006 and
2008 and
After
Contractual obligations
Total
2005
2007
2009
2009
(in thousands)
Inventory purchase commitments
$
5,254
$
—
$
2,371
$
2,883
$
—
Operating leases
124
80
44
—
—
Capital leases
40
23
17
—
—
Total— fixed contractual obligations
$
5,418
$
103
$
2,432
$
2,883
$
—
58
Management’s discussion and analysis of financial
condition and results of operations
Payment obligations under license agreements
We have future milestone payment obligations associated with our
acquisitions of most of our product candidate licenses. These
milestone payments are contingent upon future events associated
with completing various phases of clinical trials, filing NDAs
and obtaining FDA approval. Assuming that all the milestones are
met and the clinical trials for the indications we are currently
developing are successful for all the product candidates
currently under contractual agreements, we would be required to
make an aggregate of $14.8 million in milestone payments to
the licensors.
Additionally, we are required to make royalty payments to
licensors that are generally based on a specified percentage of
future net product sales of the related licensed product
candidate. The royalty percentages generally range between low
single digit to mid-double digit percentages of the
product’s net sales and are payable to the licensor upon
sales of the products.
Inventory purchase commitments
The summary of contractual commitments above includes
contractual obligations related to our supply contract for
Nitoman. Under our supply contract with Cambridge, we are
required to meet certain minimum order and sales quantities over
the next five years. In the first year of the contract, we are
obligated to pay a pre-specified price per unit for a specified
threshold of units, and for quantities in excess of that
threshold, we are charged the greater of 50% of the
pre-specified price per unit or 50% of net sales. A lower
threshold applies in all subsequent years. We have calculated
our minimum contractual payments based on the pre-specified
price per unit for units ordered below the threshold and 50% of
the pre-specified per unit for units ordered in excess of the
threshold, and we have translated the amounts to United States
dollar amounts based on the United States dollar-Canadian dollar
exchange rate at December 31, 2004. To the extent that the
United States dollar-Canadian dollar exchange rate varies, our
inventory purchase commitment will also change. Our agreement to
license and sell tetrabenazine in the United States contains
similar minimum purchase and sales quantities and accordingly,
we will have inventory purchase commitments, which are not
reflected above in our contractual obligations.
Clinical trials payments
We have entered into agreements with contract research
organizations to submit our product candidates to various phases
of clinical trials as well as to perform certain other research
and clinical studies. These agreements contain 30-90 day
without-cause termination provisions such that long-term
commitments do not exist.
Capital and operating leases
Our capital lease commitment relates to a phone system under a
three year lease. Our commitment for our operating lease relates
to a portion of our corporate headquarters in Washington, DC
that expires in 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that are
applicable to our business that we have not adopted.
INFLATION
We do not believe that inflation has had a material impact on
our business and operating results during the periods presented.
59
Management’s discussion and analysis of financial
condition and results of operations
RELATED PARTY TRANSACTIONS
For a description of our related party transactions, see
“Certain relationships and related party transactions.”
OFF-BALANCE SHEET ARRANGEMENTS
Since inception, we have not engaged in material off-balance
sheet activities, including the use of structured finance,
special purpose entities or variable interest entities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently invest our excess cash balances in money market
accounts that are subject to interest rate risk. The amount of
interest income we earn on these funds will decline with a
decline in interest rates. However, due to the short-term nature
of money market accounts, an immediate decline in interest rates
would not have a material impact on our financial position,
results of operations or cash flows.
We are exposed to movements in foreign exchange rates against
the United States dollar for inter-company trading transactions
and the translation of net assets and earnings of our Canadian
subsidiary. Our primary operating currencies are the United
States dollar and the Canadian dollar. We have not undertaken
any foreign currency hedges through the use of forward foreign
exchange contracts or options. Foreign currency exposures have
been managed solely through managing the currency denomination
of our cash balances.
60
Business
OVERVIEW
We are a product-focused specialty pharmaceutical company
engaged in the development and commercialization of small
molecule drugs with high commercial potential and relatively low
development risk that target chronic diseases of the central
nervous system, or CNS. Our strategy is to identify, acquire,
develop and commercialize product candidates that address CNS
disorders with significant unmet medical need. We also intend to
develop and market both new and enhanced delivery forms and
additional therapeutic applications of some of our product
candidates to increase their commercial potential. To date, we
have in-licensed rights relating to five product candidates, one
of which, tetrabenazine, we currently market in Canada and
expect to receive approval to market in the United States. Based
on our fast track designation, we could receive FDA approval to
market tetrabenazine in the United States as early as the first
quarter of 2006.
Our current product portfolio consists of the following five
product candidates:
--
Tetrabenazine.
Tetrabenazine is a
highly selective and reversible dopamine depletor that we market
under the brand name Nitoman in Canada and that is marketed as
Xenazine in Europe by Cambridge Laboratories Limited, or
Cambridge. Tetrabenazine, the only product ever approved for the
treatment of hyperkinetic movement disorders, is approved for
marketing in eight countries and is currently under regulatory
review for approval in several additional countries. In the
United States there is currently no FDA-approved treatment for
this broad group of movement disorders, which are characterized
by abnormal and involuntary movements. We acquired exclusive
rights to develop and commercialize tetrabenazine in the United
States from Cambridge, which has also granted us the exclusive
rights to import, distribute and market Nitoman tablets in
Canada. We have completed Phase III pivotal trials in the
United States for the use of tetrabenazine as a treatment for
chorea associated with Huntington’s disease. In September
2004, we re-launched Nitoman in Canada, where it is approved for
broad use in the treatment of hyperkinetic movement disorders.
We also expect to submit a New Drug Application, or NDA, to the
FDA in the second quarter of 2005 for the indication of chorea
associated with Huntington’s disease. The FDA has granted
tetrabenazine orphan drug designations for Huntington’s
disease and for moderate to severe tardive dyskinesia, another
movement disorder. The FDA has also granted tetrabenazine fast
track designation for chorea associated with Huntington’s
disease.
--
Lisuride.
Lisuride is a highly
potent dopamine agonist currently available in Europe as an oral
therapy for the treatment of Parkinson’s disease, a
progressive and degenerative neurological disorder that causes
loss of control over body movements. Parkinson’s disease
results from the degeneration of a small group of nerve cells in
the brain that produce dopamine, a neurotransmitter involved in
motor function and movement. Lisuride acts to mimic
dopamine’s function in the brain by stimulating dopamine
receptors. Several European regulatory authorities have
determined that the oral form of lisuride is safe and
efficacious in Parkinson’s disease. As an oral treatment,
however, lisuride has achieved only limited commercial success
due to a short half-life and highly variable absorption. In
September 2003, we in-licensed from NeuroBiotec GmbH exclusive
rights to develop and commercialize certain lisuride
formulations for transdermal, subcutaneous, intravenous and
other non-oral sustained release delivery in the United States
and Canada. Patients with Parkinson’s disease need
continuous, stable stimulation of dopamine receptors, which is
best obtained through patches or subcutaneous infusion, but no
current FDA-approved therapy provides this. We believe that the
kinetic and chemical characteristics of lisuride make it
amenable for this type of delivery. These characteristics
include high potency, short half-life, adequate solubility,
favorable dermal absorption profile and good local tolerability,
which we
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believe should make it well-suited for subcutaneous infusion and
transdermal delivery. In our opinion, these formulations can
overcome some of the key limitations of currently prescribed
therapies, such as fluctuating blood levels of dopamine agonists
that cause discomfort and disability and may hasten the onset of
motor response complications. We believe that continuous
stimulation of the dopaminergic receptors is important for the
treatment of the symptoms associated with Parkinson’s
disease and is not achieved with current therapies. In
collaboration with NeuroBiotec, we are currently conducting
clinical trials in Europe to evaluate the safety and efficacy of
our two lisuride product candidates: Lisuride Subcutaneous and
Lisuride Transdermal.
--
Lisuride
Subcutaneous. Lisuride
Subcutaneous is under development to be administered by an
external pump that infuses lisuride under the skin to deliver
continuous, stable levels of dopaminergic stimulation to treat
advanced Parkinson’s disease. Clinical trials and
compassionate use in over 450 patients in Europe have
suggested that this method of lisuride delivery may be safe and
effective in reducing the severity of symptoms associated with
advanced Parkinson’s disease, prior to or as an alternative
to brain surgery or deep brain stimulation. Our collaborator,
NeuroBiotec, has initiated a Phase III clinical trial in
Europe utilizing Lisuride Subcutaneous for advanced
Parkinson’s disease, and we expect to receive data from
this trial during the fourth quarter of 2006. We intend to use
the safety and efficacy results of these European trials as
supportive data for our regulatory submissions of Lisuride
Subcutaneous for approval in the United States and Canada. We
expect to submit an Investigational New Drug application, or
IND, in the second half of 2005 and to begin Phase III
clinical trials in the United States in early 2006. We also plan
to seek orphan drug and fast track designations from the FDA for
Lisuride Subcutaneous as a treatment for advanced
Parkinson’s disease.
--
Lisuride
Transdermal. Lisuride
Transdermal is under development as a weekly patch placed on the
skin that is intended to conveniently deliver continuous, stable
levels of dopaminergic stimulation for up to seven days.
NeuroBiotec has completed Phase I and Phase II
clinical trials in Europe and has completed enrollment of a
Phase II/ III trial in 331 patients using the Lisuride
Transdermal patch as a treatment for Parkinson’s disease.
In addition to studying lisuride as a treatment for
Parkinson’s disease, NeuroBiotec has completed a pilot
study suggesting that Lisuride Transdermal may also be an
effective and convenient therapy to control the symptoms of
Restless Legs Syndrome, another movement disorder characterized
by an overwhelming urge to move the legs. NeuroBiotec has also
recently completed a Phase II/III clinical trial in Europe
for Restless Legs Syndrome in 240 patients, and we expect
to receive results from this trial in the second half of 2005.
We have conducted three Phase I trials in Europe and expect
to submit an IND to the FDA in the second half of 2005 and to
initiate Phase III clinical trials in the United States in
early 2006.
--
D-Serine.
D-Serine is an oral,
selective amino acid co-agonist that, along with another amino
acid, glycine, stimulates the activation of the
N-methyl-D-aspartic acid, or NMDA, receptor in the brain. The
NMDA receptor plays a critical role in brain development and
memory, is important in brain function and has been suggested to
facilitate mental focus. We are developing D-Serine for the
treatment of schizophrenia, a chronic, severe and disabling CNS
disorder. Studies have demonstrated that blood levels of
D-Serine in patients with schizophrenia are significantly lower
than those in persons without schizophrenia. Multiple
physician-sponsored Phase IIa trials conducted outside the
United States have suggested that D-Serine, as an adjunct to
current therapies, can lead to significant improvements in
multiple symptoms of schizophrenia patients when compared to
current therapies alone. We believe that D-Serine, if approved
by the FDA as an
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adjunct therapy, may also potentially be developed as a
monotherapy for patients with schizophrenia. We acquired
worldwide development and commercialization rights to D-Serine
for its use in a number of neurological indications, including
schizophrenia, autism and Alzheimer’s disease, from
Massachusetts General Hospital and Glytech, Inc. We expect to
initiate our United States clinical development program with a
Phase I clinical trial following the submission of an IND for
D-Serine in late 2005. Following this trial, we will seek to
reproduce the results of the Phase IIa trials in a broad
Phase IIb clinical trial in the United States in 2006.
--
PPI-03306. PPI-03306 selectively modulates a key enzyme
involved in the synthesis of serotonin. Serotonin is a chemical
neurotransmitter implicated in the regulation of sleep cycles.
PPI-03306 is a product candidate in early development for the
treatment of sleep apnea, a disorder characterized by
interrupted breathing during sleep. There are currently no
FDA-approved drugs to treat sleep apnea. We have in-licensed
exclusive worldwide rights to develop and commercialize
PPI-03306 for the treatment of sleep apnea as well as certain
other neurological conditions. In one study conducted outside
the United States in patients with anxiety, the active
ingredient in PPI-03306 was observed in one patient to have
beneficial effects in the control of symptoms related to sleep
apnea. We have commenced a development program in Europe to
evaluate whether PPI-03306 is effective for the treatment of
sleep apnea. We expect to release the results of a
placebo-controlled Phase II trial in this program in the
fourth quarter of 2006.
OUR STRATEGY
Our goal is to become the leading specialty pharmaceutical
company serving the CNS market. We plan to achieve this goal
through identifying and in-licensing promising product
candidates that have both high commercial potential and
relatively low development risk. We intend to mitigate our
development risk by targeting drugs that have been well
tolerated in human clinical trials and, preferably, have been
shown to be efficacious in humans. We also seek to develop new
delivery forms of certain product candidates in order to
overcome the limitations of existing treatment options, in an
effort to enhance their commercial opportunity. Our strategy to
achieve our goal includes the following key elements:
Obtaining United States regulatory approval for
tetrabenazine
We recently completed Phase III clinical trials of our lead
product candidate, tetrabenazine, for the treatment of chorea
associated with Huntington’s disease. We plan to submit an
NDA for tetrabenazine to the FDA during the second quarter of
2005. We have been marketing tetrabenazine in Canada under the
Nitoman brand since September 2004 for the treatment of
hyperkinetic movement disorders and, as a result, we have
established a commercial infrastructure in Canada which we will
expand in anticipation of our expected United States approval
and subsequent launch. We believe that we will be able to take
advantage of our experience in Canada to facilitate the
successful launch of tetrabenazine in the United States should
we receive approval from the FDA. The FDA has granted us fast
track designation, which we believe should expedite review of
the NDA, and has granted tetrabenazine orphan drug designations
for Huntington’s disease and for moderate to severe tardive
dyskinesia, which should provide us with exclusive marketing
rights for tetrabenazine in the United States for
seven years following approval of the NDA.
Continuing to identify and acquire lower-risk product
candidates for CNS disorders with significant unmet medical
need
We have built our current product candidate portfolio by
acquiring or in-licensing rights to product candidates that have
the potential to satisfy significant unmet medical needs and
provide us with a period of regulatory or geographic market
exclusivity. In addition, we have sought and will continue to
seek product candidates that have been tested in humans, that
have established safety profiles and,
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as a result, that we believe will require relatively modest
expense to determine their commercial potential. Traditionally,
new product candidates addressing significant unmet medical
needs have frequently been the subject of expedited regulatory
reviews and, once approved, can experience rapid adoption rates.
In some cases, the products and product candidates we may seek
to acquire will be products that are already in commercial use
but that are approved in geographic markets outside of the
United States or for other indications. We plan to capitalize on
our expertise and our extensive relationships in the field of
CNS disorders to identify underdeveloped product candidates with
relatively low development risk, which we may seek to in-license
or acquire. The initial focus of our product candidate pipeline
has been on treatments for movement disorders, such as chorea
associated with Huntington’s disease, tardive dyskinesia,
Tourette’s Syndrome, Parkinson’s disease and Restless
Legs Syndrome. We believe that patients suffering from these
chronic disorders are underserved by existing treatment options.
In the United States, in many cases, there are either no
currently FDA-approved drugs or few effective therapeutic
treatments for these disorders. We intend to capitalize on our
experience in these niche CNS disorder segments to expand into
larger CNS disorder markets, such as schizophrenia, where
existing treatment options developed by larger pharmaceutical
companies may not be effective in all patients, may have limited
efficacy, or may have significant negative side effects.
Capitalizing on our management team’s breadth and depth
of experience to build value
Our executive management team, led by Melvin Booth, Kathleen
Clarence-Smith, David Cory, Bill Washecka, Christopher
O’Brien and Benjamin Lewis, has over 100 years of
combined industry experience in pharmaceutical product
development, successful commercialization of product candidates,
regulatory compliance, in-licensing of product candidates and
business development. Their track record includes a wide array
of experience that spans large pharmaceutical, specialty
pharmaceutical and biotechnology companies, as well as the FDA.
We believe our industry and regulatory experience will enable us
to more efficiently evaluate, acquire, develop and commercialize
product candidates and, importantly, to devise time- and
cost-efficient strategies to obtain regulatory approvals for our
new product candidates. We also believe that our expertise in
these areas should provide us with a competitive advantage in
acquiring rights to products in development that biotechnology
and pharmaceutical companies may seek to out-license.
Focusing our sales and marketing efforts on a targeted base
of high-prescribing medical professionals and taking advantage
of our experience with specialty pharmacy distribution
We estimate that there are approximately 800 movement disorder
specialists in the United States and Canada. We expect that this
concentrated physician base should enable us to target our
marketing efforts to those medical professionals who are most
likely to be the highest prescribers of drugs for the treatment
of movement disorders. We plan to build an experienced and
targeted sales and marketing team that can efficiently and
effectively launch and market our products in the United States
and Canada. To date, we have assembled a sales and marketing
management team that is experienced in mature and emerging
pharmaceutical and biotechnology companies. We believe that
their industry expertise in areas such as sales force design,
market development, pricing, reimbursement, product distribution
and the establishment of relationships with key opinion leaders
will favorably differentiate us from potential competitors.
We also plan to distinguish ourselves by distributing our
products through one or more specialty pharmacies that will
provide dedicated teams of trained pharmacists, nurses, patient
care coordinators, and reimbursement specialists who offer
patient support, counseling and compliance management to our
target markets. We believe that our use of specialty pharmacies
to distribute our products will allow us to more rapidly
penetrate target markets, expand product use, build product and
brand loyalty, increase
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patient compliance and enhance product value to physicians and
patients. At the same time, we believe that distributing our
products through specialty pharmacies will provide us with
greater control of product inventories and product distribution,
as well as better access to prescription data.
Optimizing partnering and collaboration opportunities
We anticipate that our business model and product candidate
pipeline should provide multiple opportunities for future
revenue and earnings, both through developing and, if approved,
commercializing these candidates for larger markets.
Additionally, we plan to collaborate with companies with larger
sales forces and broader physician coverage than ours and, for
those product candidates for which we have rights outside the
United States and Canada, we may grant other companies licenses
to pursue these markets. Our product candidates for
schizophrenia, Restless Legs Syndrome and sleep apnea intend to
serve markets that are larger than the selected movement
disorder markets that our sales force will initially target.
Although we expect to be well-positioned to promote our product
candidates in the United States and Canada for these larger
physician target populations that represent significant
potential market opportunities, we will likely seek marketing
partners with broader physician coverage to enhance the
commercial potential. In some cases, we may also seek to
out-license commercial and development rights outside the United
States and Canada. Because large, multinational pharmaceutical
companies are increasingly seeking products with very large
revenue potential, we believe that we could have attractive
opportunities to partner our pipeline candidates should we
choose to do so. We anticipate that establishing these
partnerships will provide us with up-front payments,
co-promotion opportunities and potential royalties on sales from
approved products.
MARKET OPPORTUNITY
Our initial product candidates will target the underserved
markets for selected movement disorders as well as schizophrenia
and sleep apnea. The movement disorders market can generally be
divided into hyperkinetic and hypokinetic disorders but also
includes disorders such as Restless Legs Syndrome.
Hyperkinetic movement disorders
Hyperkinetic movement disorders are generally characterized by
involuntary, purposeless movements that flow randomly from one
body part to another. This market includes approximately 350,000
people in the United States and Canada. There are currently no
FDA-approved treatments for this group of disorders in the
United States. One of the disorders within this class is known
as chorea, which is characterized by brief, irregular
contractions that are not repetitive or rhythmic, but appear to
flow from one body part to the next, and which may occur with
athetosis, characterized by slow, twisting and writhing
movements. Chorea is a primary symptom of Huntington’s
disease but may also be the expression of a wide range of
disorders, including metabolic, infectious, inflammatory,
vascular, neurodegenerative, as well as drug-induced syndromes.
Other hyperkinetic movement disorders include tardive dyskinesia
(also known as drug-induced chorea), Tourette’s Syndrome,
Sydenham’s chorea, hemiballism and senile chorea. The
initial target indications for our first product candidate,
tetrabenazine, are highlighted below.
--
Chorea associated with
Huntington’s
disease.
Huntington’s disease is a progressive and eventually fatal
hereditary disease that destroys neurons in the areas of the
brain involved in emotion, intellect, and movement. The
progression of Huntington’s disease is characterized by
chorea, progressive loss of mental abilities, and the
development of personality disorders. Chorea is the most visible
and common of the motor symptoms observed in patients with
Huntington’s disease. Huntington’s disease usually
appears between the ages of 35 and 50, but has been documented
in younger and older people as well. Huntington’s disease
progresses without remission over 15 to 20 years and
patients ultimately are unable to care for themselves. According
to the Huntington’s
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disease Society of America, approximately 33,000 people in the
United States and Canada suffer from Huntington’s disease.
There are currently no FDA-approved drugs in the United States
for the treatment of chorea associated with Huntington’s
disease.
--
Tardive dyskinesia. Tardive dyskinesia is a neurological
syndrome caused by the long-term use of neuroleptic drugs.
Neuroleptic drugs are generally prescribed for psychiatric
disorders such as schizophrenia and bipolar disorder. Tardive
dyskinesia is characterized by repetitive, involuntary,
purposeless movements. Features of the disorder may include
kissing, blowing, lip pursing and tongue protrusion. Based on
our market research, we estimate that over 5 million people
currently take neuroleptic drugs in the United States and
Canada, and we estimate that there are approximately 150,000
people with tardive dyskinesia severe enough to warrant
treatment. There are currently no FDA-approved drugs in the
United States for the treatment of tardive dyskinesia.
--
Tourette’s Syndrome. Tourette’s Syndrome is an
inherited neurological disorder that generally becomes evident
in early childhood or adolescence. Tourette’s Syndrome is
characterized by multiple involuntary motor and vocal muscle
contractions, or tics. According to our market research, there
are approximately 170,000 people in the United States and Canada
with Tourette’s Syndrome. Existing treatments for
Tourette’s Syndrome are only moderately efficacious and
often have unwanted side effects.
Hypokinetic movement disorders
Hypokinetic movement disorders are generally characterized by
tremor, slowness of movement, and progressive loss of control
over body movements. The most prevalent of these disorders is
Parkinson’s disease. According to the National
Parkinson’s Foundation, there are approximately
1 million people in the United States and Canada with
Parkinson’s disease. Of the patient population with
Parkinson’s disease, according to our market research, we
estimate that as many as 100,000 of these patients are in the
advanced stages of Parkinson’s disease. Although current
oral medications are initially effective in treating the
symptoms of mild to moderate Parkinson’s disease, over time
most patients progress and develop motor response complications,
which limit the long term or overall utility of current
treatments. Advanced stage patients spend their days suffering
with unpredictable function due to fluctuating symptoms, also
known as “on-off” swings, leading to a severely
impaired quality of life.
Restless Legs Syndrome
Restless Legs Syndrome is characterized by an overwhelming urge
to move the legs caused by uncomfortable or unpleasant
sensations in the legs. These sensations typically occur during
periods of inactivity and generally become more pronounced at
night, sometimes leading to sleep deprivation. According to our
market research, Restless Legs Syndrome afflicts as many as
30 million people worldwide, and we estimate that there may
be more than 1 million people in the United States and
Canada with Restless Legs Syndrome severe enough to warrant
treatment. Despite the high prevalence rate and considerable
impact on quality of life, few people with Restless Legs
Syndrome are diagnosed and receive treatment, primarily due to
lack of awareness. Additionally, until recently, the
pharmaceutical industry generally has not focused on Restless
Legs Syndrome, also contributing to the lack of awareness and
diagnosis. Dopamine agonists can be effective in the treatment
of Restless Legs Syndrome and in most cases are now considered
by leading practitioners to be first-line treatment, generally
used on an “off-label” basis, meaning that they have
been approved by the FDA only for other indications. At least
five drugs are currently in development for Restless Legs
Syndrome, but to date no drug has been approved for treatment of
Restless Legs Syndrome by the FDA.
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Table 1: Potential market opportunity for chronic
movement disorders
Estimated Patient
Population in the
United States
Type of Movement Disorder
Indication
and Canada
Hyperkinetic
Chorea associated with Huntington’s disease
33,000
Tardive dyskinesia
150,000
Tourette’s Syndrome
170,000
Hypokinetic
Advanced Parkinson’s disease
100,000
Parkinson’s disease
1,000,000
Other
Restless Legs Syndrome
1,000,000
Schizophrenia
Schizophrenia is a devastating chronic mental disorder that,
according to the National Alliance for Research on Schizophrenia
and Depression, affects an estimated 50 million people
worldwide. According to the United States Surgeon General, there
are more than 2 million people in the United States
suffering from schizophrenia in any given year. Schizophrenia is
characterized by positive symptoms (such as hallucinations),
negative symptoms (such as apathy, depression and social
withdrawal) and cognitive dysfunction. In 2004, the United
States prescription antipsychotic market for the treatment of
schizophrenia was in excess of $6 billion according to
Frost & Sullivan, a provider of business intelligence
and strategic consulting services for the pharmaceutical and
healthcare industries. Existing treatments have focused on
blocking the dopamine pathways in the brain by using neuroleptic
medications such as antipsychotics. While effective at reducing
many of the positive symptoms of schizophrenia, these existing
neuroleptic drugs are not effective in all patients, do not
generally improve the negative symptoms or cognitive dysfunction
associated with schizophrenia and have been shown to have
significant adverse side effects such as tardive dyskinesia,
weight gain and diabetes.
Sleep apnea
Sleep apnea is a common sleep disorder, afflicting an estimated
18 million people in the United States alone, according to
the United States Department of Health and Human Services. Sleep
apnea is characterized by brief interruptions in breathing
(approximately 10 to 30 seconds at a time) during sleep.
These short stops in breathing can occur as often as hundreds of
times every night, leading to daytime sleepiness and impaired
quality of life. Sleep apnea has also been shown to increase the
risk of heart attack and hypertension. There are three types of
sleep apnea: obstructive, central, and mixed. Of the three
types, obstructive sleep apnea is the most common and is caused
by a blockage of the airway, usually when the soft tissue in the
rear of the throat collapses and closes during sleep. In central
sleep apnea, the airway is not blocked, but the brain fails to
signal the muscles to breathe due to the progressive loss of a
small group of nerve cells in the brain. Mixed sleep apnea, as
the name implies, is a combination of obstructive and central
sleep apnea. The only currently available treatments include
invasive surgery or the use of a continuous positive airway
pressure (CPAP) mask while sleeping, which is uncomfortable
and cumbersome for many patients. The cause of sleep apnea
remains unknown, and there is currently no validated animal
model of the disease, making it very difficult to study the
underlying causes of the disease and discover a pharmacologic
therapy. There are currently no FDA-approved drugs indicated for
the treatment of any form of sleep apnea.
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OUR PRODUCT CANDIDATES
We believe that our expertise enables us to identify, acquire,
develop and commercialize therapies that address the underlying
biological mechanisms of CNS disorders. We currently have five
product candidates targeting multiple therapeutic indications,
one of which we already market in Canada. Chart A below
depicts the clinical development status of our product
candidates and reflects clinical trials that we and our
collaborators have conducted, both in and outside the United
States, in support of our expected regulatory submissions.
TETRABENAZINE
Product overview
Tetrabenazine is a highly selective and reversible dopamine
depletor that we market under the brand name Nitoman in Canada
for the treatment of hyperkinetic movement disorders. In the
United States, we recently completed Phase III pivotal
trials and plan to file an NDA during the second quarter of 2005
for tetrabenazine to treat chorea associated with
Huntington’s disease. Tetrabenazine has been granted orphan
drug designations by the FDA for Huntington’s disease and
for moderate to severe tardive dyskinesia, which we expect will
provide us with seven years of marketing exclusivity in the
United States if we receive FDA approval. Following the
anticipated approval of tetrabenazine for the treatment of
chorea associated with Huntington’s disease, we intend to
initiate Phase III studies of tetrabenazine for the
treatment of tardive dyskinesia and, provided we receive consent
from our licensor, for the treatment of Tourette’s
Syndrome, to enhance tetrabenazine’s commercial potential.
We also intend to submit a request to the FDA for orphan drug
designation of tetrabenazine for the treatment of
Tourette’s Syndrome.
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Tetrabenazine, which has been approved in eight countries and is
marketed by Cambridge under the brand name Xenazine in Europe,
was initially developed by Hoffmann-La Roche in the
mid-1950s as an antipsychotic drug. While the drug never gained
wide usage as a treatment for schizophrenia, it was determined
in several small placebo-controlled crossover studies, to be
effective for the treatment of chorea, with response rates
ranging from 70% to 90%. Tetrabenazine was first approved in the
United Kingdom for the treatment of chorea in 1971 and has been
available in several countries for over 20 years.
Additionally, long-term human exposure to tetrabenazine has been
extensive, with some patients having been treated for over
15 years. Over 1,000 patients in the United States
have received tetrabenazine under investigator-sponsored
open-label INDs, and several hundred patients currently purchase
Xenazine on a cash basis in the United States from their
physicians. Because tetrabenazine has been used for so many
years and has no patent protection, we intend to rely on orphan
drug designation, which should provide us with an expected
period of seven years of market exclusivity, if and when
tetrabenazine is approved for the treatment of chorea associated
with Huntington’s disease.
Market overview
We estimate that the markets for chorea and related hyperkinetic
movement disorders in the United States and Canada collectively
include approximately 350,000 patients. The major hyperkinetic
movement disorder markets for which we are seeking FDA approval
will initially include chorea associated with Huntington’s
disease, tardive dyskinesia, and Tourette’s Syndrome.
Chorea associated with Huntington’s disease
Chorea associated with Huntington’s disease is the most
visible and common of the motor symptoms generally observed in
Huntington’s disease patients. Huntington’s disease is
a progressive and eventually fatal inherited genetic disorder
associated with a mutation of the Huntingtin gene. The
Huntington’s Disease Society of America estimates the
prevalence of Huntington’s disease at approximately 33,000
people in the United States and Canada. Because symptoms of
Huntington’s disease typically do not appear until
individuals are between the ages of 35 and 50, people with the
disease may have children before symptoms appear, and therefore
the genetic defect is often transmitted to the next generation.
As a result, we expect the incidence of Huntington’s
disease to remain relatively stable in the future. The three
characteristic symptoms of Huntington’s disease are chorea,
personality disorders and progressive mental deterioration, or
dementia. These symptoms may occur together at the onset of the
disease or one may precede the others by a period of years. The
severity of chorea in patients with Huntington’s disease
varies, but abnormal movements usually become gradually more
severe and many patients ultimately experience very severe
chorea. There are currently no FDA-approved drugs for the
treatment of chorea associated with Huntington’s disease.
Drugs currently used to treat chorea associated with
Huntington’s disease are generally prescribed on an
off-label basis. Current treatments for chorea associated with
Huntington’s disease include dopamine receptor blocking
drugs, or DRBDs, such as neuroleptic antipsychotics and dopamine
depleting drugs. However, excessive dopamine receptor blockade
can result in unwanted side effects including bradykinesia, or
slow movement, and muscle rigidity, or stiffness. Additionally,
neuroleptics block other neuroreceptors, leading to hypotension,
increased cognitive impairment and, potentially, tardive
dyskinesia. This side effect presents a problem in the
management of patients with Huntington’s disease, where
treatment is chronic. Due to its unique mechanism of action, we
believe that tetrabenazine has a significant advantage over
traditional DRBDs in that it does not cause tardive dyskinesia.
Clinical use in numerous studies has supported the safety and
efficacy of tetrabenazine in the treatment of chorea associated
with Huntington’s disease.
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Tardive Dyskinesia
Tardive dyskinesia is a hyperkinetic movement disorder that
appears after exposure to neuroleptic drugs, which are most
often used for the treatment of schizophrenia and bipolar
disorder. According to Verispan, over 5 million people in
the United States and Canada currently take neuroleptic
medications. According to our market research, we estimate that
approximately 150,000 people in the United States and Canada
experience tardive dyskinesia that is severe enough to warrant
treatment. Tardive stereotypy, which is defined as involuntary,
patterned, continuous, purposeless movement, is the most common
type of tardive dyskinesia. Tardive stereotypy usually involves
orofacial lingual movements including kissing, blowing, lip
pursing, and tongue protrusion. The incidence of tardive
dyskinesia has been found in some studies to be as high as 20%
to 60% in patients using typical neuroleptics, such as
haloperidol, fluphenazine and thioridazine. Newer, atypical
antipsychotics, such as olanzepine, risperidone, aripiprazole
and quetiapine, also have been shown to cause tardive dyskinesia
in some studies, but in a smaller percentage of patients.
Metoclopramide, a commonly used gastrointestinal medication, has
also been shown, in some studies, to cause tardive dyskinesia in
up to 30% of patients receiving it. Tetrabenazine has received
orphan drug designation for the treatment of moderate to severe
tardive dyskinesia.
Tardive dyskinesia often goes untreated. There are currently no
FDA-approved drugs to treat tardive dyskinesia. In view of the
prevalence of schizophrenia and bipolar disorders in North
America, and the number of people treated with neuroleptics, we
believe that there is a significant market opportunity for a
drug to treat tardive dyskinesia. Clinical use of tetrabenazine
in numerous physician-sponsored studies has demonstrated its
safety and efficacy in the treatment of tardive dyskinesia.
Tourette’s Syndrome
Tourette’s Syndrome is an inherited neurological disorder,
which is manifested by motor and phonic tics that generally
emerge in childhood or adolescence. Tics, the primary symptom of
Tourette’s Syndrome, are relatively brief and intermittent
movements (motor tics) or sounds (phonic tics) that can be
semivoluntary or involuntary. According to our market research,
there are approximately 170,000 people in the United States and
Canada with Tourette’s Syndrome. Medications commonly used
to treat Tourette’s Syndrome, including haloperidol,
pimozide and other neuroleptics, can result in a number of
adverse side effects such as sedation, depression, weight gain,
school phobia and tardive dyskinesia. The prevalence of these
side effects can make current treatment options unattractive for
patients with Tourette’s Syndrome. Clinical use and
numerous physician-sponsored, open-label clinical studies have
supported the safety and efficacy of tetrabenazine in the
treatment of tics associated with Tourette’s Syndrome.
Historical studies with tetrabenazine
In the United States, patients have been receiving tetrabenazine
for several years under physician-sponsored INDs. One of these
INDs is held by the Parkinson’s Disease Center and Movement
Disorder Clinic at the Baylor College of Medicine, where
patients have been treated with tetrabenazine since the early
1980s. The first study conducted at this center was a
double-blind, placebo-controlled, crossover study in
19 patients with abnormal involuntary movement disorders.
In a double-blind study, neither the patient nor the clinician
knows whether the patient is receiving the investigational
therapy or the placebo, and in a crossover study, at a
predetermined point in time the experimental population and the
control group are switched without the knowledge of the subjects
or the persons administering treatment. The Baylor study
concluded that the efficacy of tetrabenazine in reducing
abnormal movements was significantly superior to that of the
placebo and that tetrabenazine was well tolerated and safe.
Following this study, patients continued to be enrolled and
treated at Baylor in an open-label fashion, meaning that both
the patient and the researcher were aware of the drug being
administered.
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As illustrated in Chart B below, a published retrospective
analysis of 400 patients with various severe hyperkinetic
and other movement disorders treated with tetrabenazine between
1980 and 1991 concluded that response rates to tetrabenazine are
high across a variety of hyperkinetic movement disorders.
Patients were assessed using a Global Response Scale of 1
to 5, where 1 equals marked reduction in abnormal movements
and excellent improvement in function; 2 equals moderate
reduction in abnormal movements and very good improvement in
function; 3 equals moderate improvement in abnormal movements
and only mild or no improvement in function; 4 equals poor
response or no change in abnormal movements or function; 5
equals worsening of movement disorder, deterioration in
function, or both. The most common side effects, which were
expected based on the pharmacologic profile of tetrabenazine,
included drowsiness, parkinsonism, depression, and insomnia.
These side effects were all controlled to the satisfaction of
the physicians involved in the study by reducing the dosage
although 23% of the patients discontinued therapy due to side
effects. Based on their analysis of patient records using an
unvalidated rating scale, the authors concluded that
tetrabenazine may be an effective and safe drug for the
treatment of a variety of hyperkinetic movement disorders.
Tetrabenazine clinical results
We recently completed a Phase III pivotal trial using
tetrabenazine for the treatment of chorea associated with
Huntington’s disease. We believe that this indication
represents the most serious unmet medical need and provides us
with the fastest and most cost-effective path to seek approval
of tetrabenazine in the United States. In our February 2005
pre-NDA meeting with representatives of the neuropharmacology
division of the FDA, we were granted permission to submit with
priority review designation our NDA package containing the
results of our pivotal study, which we refer to as Tetra-HD, as
well as our supporting pivotal study results (TBZ 103,005)
and the analysis of all open-label Huntington’s disease
patients treated at the Baylor College of Medicine described
above.
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Our primary pivotal study, Tetra-HD, was a multi-center (16
centers across the United States), randomized, double-blind,
placebo-controlled study in two parallel unbalanced groups. In a
randomized study, each patient has the same chance of being
assigned to the investigational therapy group or the control
group. The main objective of our Tetra-HD study was to
demonstrate the efficacy and safety of tetrabenazine for the
treatment of chorea associated with Huntington’s disease. A
total of 84 patients were enrolled, of which 54 were
randomly selected to receive tetrabenazine, and 30 were randomly
selected to receive a placebo, over a treatment duration of
12 weeks. The primary clinical endpoint of the study was
mean change in baseline chorea, as measured on the Unified
Huntington’s Disease Rating Scale, or UHDRS, and one of the
secondary clinical endpoints of the study was Clinical Global
Impression, or CGI. Representatives of the Division of
NeuroPharmacological Drug Products of the FDA indicated in our
pre-IND and end-of-Phase II meetings that total chorea
score using UHDRS as the primary endpoint and CGI as the
secondary endpoint would be acceptable as qualified measures of
efficacy for product approval.
During the first seven weeks of the treatment period, which was
the titration phase, the dose of tetrabenazine was titrated up
at weekly intervals by 12.5 milligram, or mg, tablet
increments, up to a target maximum dosage of 100 mg daily.
Tetrabenazine was administered once daily and twice daily at the
lower dosages of 12.5 mg and 25 mg per day,
respectively, and three times daily at all other dosages. The
study’s investigators were instructed to titrate each
patient up to his or her optimal dosage, or “best
dose,” based on a balance of highest therapeutic effect
against lowest occurrence of side effects. Following the
titration phase of the study, participants remained on their
best dose of tetrabenazine for the remainder of the study, with
the last five weeks of the study considered to be the
maintenance phase. During the maintenance phase, investigators
were to keep patients on their best dose of tetrabenazine unless
it could not be tolerated by the patient, in which case the dose
would be reduced to the highest well-tolerated dose.
As illustrated in Chart C below, during the treatment
period of the Tetra-HD study, the mean chorea score for
participants in the tetrabenazine group declined by
5.0 units, while the mean chorea score for participants in
the placebo control group only declined by 1.5 units. The
difference between the two treatment groups was highly
statistically significant (p<0.0001) from Week 3
onward. A p-value is a mathematical calculation used to
determine the statistical validity of experimental results. A
p-value of 0.0001 means that the probability that this result
occurred by chance is one in 10,000. Statistical significance is
usually defined as a p-value of less than 0.05, which means that
the probability that this result occurred by chance is less than
one in 20. A lower p-value indicates a greater likelihood that
the observed result did not occur by chance, and therefore
implies greater statistical significance. At the end of the
12-week treatment period, participants were studied for one week
during which their treatment, whether tetrabenazine or placebo,
was withdrawn. During this withdrawal, or wash-out, period, the
mean chorea score for patients in both treatment groups returned
to baseline values. The mean chorea score for participants in
the tetrabenazine group increased by 5.0 units, while the
mean chorea score for participants in the placebo control group
increased by 1.0 units. We believe that the rapid
reemergence of chorea associated with Huntington’s disease
in patients who stopped taking tetrabenazine should encourage
patient compliance in the future.
The Tetra-HD study proved that tetrabenazine was highly
statistically significant when compared to placebo for the
treatment of chorea associated with Huntington’s disease
(p<0.0001). Sixty-nine percent of the participants in the
tetrabenazine group experienced a clinically relevant decrease
in chorea score of at least 3.0 units. Of these patients,
72% experienced a major decrease in chorea score of at least
6.0 units. Of the 22 patients with severe chorea
associated with Huntington’s disease (baseline UHDRS score
of >14), 11 patients, or 50%, experienced a chorea
score decrease of at least
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10.0 units. These results are consistent with the analysis
of one of our secondary clinical endpoints, which demonstrated
that 45% of the participants in the tetrabenazine group were
“very much” or “much” improved, as measured
on the CGI Part 2 scale (Clinical Global Improvement),
while only 7% of participants in the placebo control group were
“very much” or “much” improved (p<0.007).
In the Tetra-HD study, eight of 54 patients treated with
tetrabenazine were reported to have an adverse event of
depression versus none of the placebo-treated patients. Reducing
the dose of tetrabenazine, and/or increasing the dose of
concomitant antidepressant or treatment with an antidepressant,
were found to reduce or reverse depression. The use of
antidepressant drugs did not interfere with the anti-chorea
efficacy of tetrabenazine. Notably, one tetrabenazine-treated
patient in the Tetra-HD study committed suicide. The rates of
both depression and suicide have been reported to be high in
patients with Huntington’s disease, and suicide is the
third leading cause of death among patients with
Huntington’s disease.
Our second, supporting pivotal study known as TBZ 103,005
was a single-center, randomized, double-blind,
placebo-controlled, staggered withdrawal study conducted in a
group of 30 patients with chorea associated with
Huntington’s disease. The primary objective was to evaluate
the efficacy of tetrabenazine in chorea associated with
Huntington’s disease by demonstrating a return of chorea
when tetrabenazine was withdrawn, as measured by an increase in
the patients’ UHDRS Chorea Score. A secondary objective was
to evaluate the time-course of the return of chorea by measuring
severity of chorea three and five days after treatment
discontinuation. Participants were required to have been on a
stable dose of tetrabenazine for at least two months prior to
enrolling in the study and to have been responding to the drug
at the time of withdrawal. The dosage of tetrabenazine in the
30 patients at the beginning of the withdrawal study ranged
from 12.5 mg per day to 150 mg per day. Of the
30 patients enrolled in the study, 29 had been receiving
daily doses of 100 mg per day or less when the study began.
The treatment period for this study was five days. Of the
30 patients enrolled in this study, 12 were randomly
selected to begin receiving a placebo on Day 1
(Group 1), 12 were randomly selected to begin receiving a
placebo on Day 3 (Group 2), and six were randomly
selected to continue receiving
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tetrabenazine throughout the whole study (Group 3). All
patients in the study were off the drug on Day 5
(participants in Group 3 took their last tablet of
tetrabenazine on the evening of Day 4).
As shown in Table 2 below, the mean UHDRS chorea scores
increased within 18 hours or less (Group 2 on
Day 3, Group 3 on Day 5). Although the study
demonstrates a clear trend, the difference between groups
achieved a p-value of 0.078, which is higher than p<0.05,
the measure customarily considered to represent statistical
significance. Therefore, the probability that these results
occurred by chance is greater than the FDA is customarily
willing to accept. In this study, abrupt discontinuation of
tetrabenazine treatment also did not result in any significant
pattern of adverse events that could have suggested a withdrawal
syndrome.
Table 2: TBZ 103,500 Withdrawal Study (Mean UHDRS Chorea
Scores by Group)
Day 3
Day 1
Day 5
Withdrawal Group
On Tetrabenazine
Off Tetrabenazine
On Tetrabenazine
Off Tetrabenazine
Group 1
(n=12)
9.4
14.8
—
14.8
Group 2
(n=12)
9.1
12.7
—
14.6
Group 3
(n=6)
11.2
—
12.8
15.2
We conducted 48-week follow-on, open-label trials after each of
the Tetra-HD and withdrawal studies described above. Ninety
percent of the patients from both double-blind trials requested
to participate in the follow-on trials and continued in the
open-label tetrabenazine treatment protocols. There was no
statistically significant loss of efficacy of tetrabenazine in
reducing chorea over this additional treatment period of nearly
one year.
The data from our clinical trials supports the gradual upward
titration of tetrabenazine by one 12.5 mg tablet per week,
not to exceed 100 mg daily, up to a best dose. Our clinical
trials show that, when upward titration of the dose is limited
by side effects such as sedation, parkinsonism, depression and
akathisia, or restlessness, which are believed to result from
the dopamine depleting properties of tetrabenazine, dose
reductions resulted in maintained efficacy and reversal of the
adverse effects in 75% of patients. Finally, we believe that our
clinical trials have shown that abrupt withdrawal of
tetrabenazine is tolerated.
As noted above, the results of our Phase III withdrawal
study, though demonstrating a clear trend and meeting the
defined clinical endpoint, achieved a p-value of 0.078, higher
than the p-value of less than 0.05 which customarily represents
statistical significance. Because most products that the FDA
approves have at least two Phase III pivotal trials that
meet their clinical endpoints with p-values of less than 0.05,
the FDA may require us to conduct another Phase III pivotal
trial before it approves tetrabenazine for commercialization. We
are presently planning to conduct a third Phase III pivotal
trial, primarily for marketing purposes, to begin in the second
half of 2005. This trial will be a double-blind, randomized,
placebo-controlled trial that will measure the effects of
tetrabenazine on chorea scores. In addition, as part of the
clinical trial, we will measure the duration of action of a dose
of tetrabenazine. If the FDA requires us to conduct an
additional pivotal trial prior to approving our NDA, we would
expect to use the results from this trial, when available, to
support our NDA.
As part of the NDA application process, we will need to conduct
certain safety studies, including carcinogenicity studies. We
expect to be able to conduct these studies as Phase IV, or
post-approval, commitments. However, we may be required to
complete these studies before our NDA is considered for
approval, which would result in the delay of the FDA’s
consideration of our NDA. Additionally, we have committed to
undertake a bioavailability study, which is currently ongoing.
We anticipate that
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we will submit the results of this study in conjunction with the
four month safety update in the third quarter of 2005. We may
also need to conduct a special study of the metabolism of
tetrabenazine in animals and humans (also called
14[C]
study).
Mechanism of action
Tetrabenazine is a highly selective and reversible inhibitor of
a neuronal protein called vesicular monoamine transporter, or
VMAT2, which transports dopamine. Dopamine is a neurotransmitter
that enables communication among nerve cells involved in motor
control. VMAT2 is only found in the CNS and is critical to
neural function through regulating the location, method, type
and amount of dopamine released during nerve signaling. Because
many of the effects of dopamine on voluntary and involuntary
movements are regulated by VMAT2, the pharmacologic manipulation
of this protein has broad implications for the treatment of
hyperkinetic movement disorders. Tetrabenazine is the only drug
known to selectively and reversibly bind to VMAT2, leading to
its potential application as a chronic treatment for multiple
hyperkinetic movement disorders.
We believe that the CNS selectivity of tetrabenazine
differentiates it from reserpine, the only other known dopamine
VMAT2 inhibitor. Reserpine is a non-selective, irreversible
inhibitor of both VMAT2 and VMAT1 (which is found outside the
CNS), and thus produces both central and peripheral dopamine
depletion. Reserpine causes long-lasting central and peripheral
monoamine depletion and adverse side effects, including severe
hypotension. In contrast, because of tetrabenazine’s
selective molecular mechanism of action (depicted in the
neuronal synapse schematic below), dopamine depletion induced by
a single dose of tetrabenazine has been shown in studies to be
reversible and to last only a few hours.
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Neuronal Synapse Schematic
Tetrabenazine commercialization strategy
We began distributing Nitoman in Canada during September 2004.
Under our agreement with Cambridge, we are obligated to either
purchase certain annual minimum quantities of Nitoman from
Cambridge at a per-unit product sales price or make payments in
an amount equal to 50% of net product sales, whichever is
greater. We currently promote Nitoman in Canada through a sales
team comprised of a regional director, three sales
representatives, and a medical science liaison specialist.
Acquiring commercial rights to Nitoman in Canada has offered us
the opportunity to build our sales and marketing infrastructure
and gain additional expertise in the hyperkinetic movement
disorder market in advance of our anticipated United States
launch. Additionally, we believe that marketing in Canada will
allow us to strategically control distribution and pricing in
Canada and subsequently in the United States. Phase 4
Health, a Canadian specialty pharmacy that was acquired in
January 2005 by McKesson Canada, a wholly owned subsidiary of
McKesson Corporation, has been fulfilling prescriptions for
Nitoman in Canada. Phase 4 Health provides patients with
reimbursement assistance, patient counseling and a compliance
program. Additionally, Phase 4 Health manages product
sampling to encourage new patient trials. As of March 2005, we
have had the benefit of advice from Phase 4 Health
regarding the marketing and supply of Nitoman in Canada. With
the assistance of Phase 4 Health, we intend to refine the
retail marketing and supply of Nitoman in Canada approximately
three months prior to the expected United States launch of
tetrabenazine. We believe that this will allow us to better
control the distribution of Nitoman in Canada and reduce
potential importation of Nitoman into the United States.
The FDA has designated tetrabenazine as a fast track product
candidate. Fast track designation is intended to facilitate
development and expedite review of drugs to treat serious and
life-threatening conditions so that an approved product can
reach the market expeditiously. Product candidates in fast
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track development programs may be considered for a priority
review. An NDA submitted for a product candidate with a fast
track designation ordinarily will generally be eligible for
priority review of six months. Based upon the fast track
designation of tetrabenazine, we believe that we could receive
FDA approval to market tetrabenazine in the United States as
early as the first quarter of 2006, but approval may be delayed
or may not be received at all.
Subject to FDA approval, we intend to market tetrabenazine in
the United States under the brand name Xenazine and to promote
the product through our targeted team of specialty
neuroscience-focused sales representatives. Our sales
representatives will initially target the approximately 800
movement disorder specialists, as well as high-prescribing
neurologists and psychiatrists, in the United States and Canada.
All of these physician specialties may play a role in the care
and treatment of patients with Huntington’s disease. In
addition, our market development efforts will include local,
regional, and national symposia, teleconferences, and medical
conference and convention activity, which we believe will expand
our reach to additional prescribers for the approved indications.
We also intend to utilize specialty pharmacy distribution for
tetrabenazine in the United States. We believe that the chronic
nature of hyperkinetic movement disorders, the concentrated
prescriber base and the special needs of our patient population,
make tetrabenazine especially well-suited for the quality of
care that specialty pharmacy distribution can provide. We expect
that the use of specialty pharmacy distribution will also
provide us with precise inventory control and real-time access
to prescriber and prescription data.
LISURIDE
Product overview
We are developing two lisuride product candidates, one of which
is formulated for the subcutaneous administration of lisuride
(Lisuride Subcutaneous) for treating advanced Parkinson’s
disease, and one of which is a patch formulated for the
transdermal delivery of lisuride (Lisuride Transdermal) for
treating Parkinson’s disease and Restless Legs Syndrome. We
have in-licensed exclusive rights from NeuroBiotec to sell
lisuride in the United States and Canada, and in collaboration
with NeuroBiotec, we are developing lisuride to be administered
by subcutaneous and transdermal delivery methods. NeuroBiotec
has initiated a Phase III clinical trial in Europe for
Lisuride Subcutaneous and has completed enrollment of a
Phase II/III trial in Europe for Lisuride Transdermal in
the treatment of Parkinson’s disease. NeuroBiotec has also
recently completed a Phase II/III trial in Europe for
Lisuride Transdermal in the treatment of Restless Legs Syndrome.
We have conducted three Phase I trials in Europe of
Lisuride Transdermal, which have evaluated the linearity of
dose, sustained release over seven days from a single patch,
influence of different sites of application, adhesivity and
local tolerability of the Lisuride Transdermal patch. We intend
to use the results of these trials as part of our IND package to
be submitted to the FDA. We expect to submit an IND for both
Lisuride Subcutaneous in advanced Parkinson’s disease and
Lisuride Transdermal in Parkinson’s disease and Restless
Legs Syndrome in the second half of 2005. We expect to initiate
clinical trials in the United States for both forms of lisuride
delivery by 2006. We plan to seek orphan drug exclusivity and
fast track status from the FDA for Lisuride Subcutaneous in
advanced Parkinson’s disease.
Lisuride is a highly potent dopamine agonist that has been used
in some countries outside the United States for over
25 years as an oral medication for the treatment of
multiple disorders, including migraine prevention since 1977,
hyperprolactinemia, which is characterized by excessive
production of breast milk, typically after childbirth, since
1983 and Parkinson’s disease since 1985. The safety and
side effect profile of lisuride when taken orally has been well
documented in humans. As an oral treatment, however, lisuride
has achieved only limited commercial viability due to a short
half-life and erratic absorption. In contrast, the kinetic and
chemical characteristics of lisuride, including high
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potency, short half-life and a favorable dermal absorption
profile make it well-suited for subcutaneous infusion and
transdermal delivery. Because lisuride has been used for over
25 years, there is no patent protection for the lisuride
compound. We have applied for patent protection in the United
States covering the methods of use and formulation.
Additionally, we will seek to rely on trade secret protection
for the methods of use and formulation.
Market overview
Parkinson’s disease
According to the National Parkinson’s Foundation, the
Parkinson’s disease market includes over 1 million
people in the United States and Canada. Of this patient
population, we believe that there are as many as 100,000 people
in the advanced stages of the disease. The primary symptoms of
Parkinson’s disease are tremor, or trembling in hands,
arms, legs, jaw, and face; rigidity, or stiffness of the limbs
and trunk; bradykinesia, or slowness of movement; and postural
instability, or impaired balance and coordination. As these
symptoms become more pronounced, patients may have difficulty
walking, talking, or completing other simple tasks. The average
age of onset of Parkinson’s disease is 60, and the
prevalence of the disease is expected to increase as the
“baby boomer” population ages.
Parkinson’s disease occurs when a group of cells that
produces dopamine in an area of the brain called the substantia
nigra begin to degenerate. The underlying cause for
Parkinson’s disease remains unknown, and there is currently
no cure, but several medications, as well as surgery, are
currently used to treat the symptoms of Parkinson’s
disease. Approved medicines for the treatment of
Parkinson’s disease aim to restore and maintain normal
movement, or “on” periods, and decrease rigidity and
freezing, or “off” periods. The mainstay of medical
treatment for Parkinson’s disease is a combination of
levodopa, a substance that is converted into dopamine, and
carbidopa, a substance that protects levodopa from conversion
into dopamine until it reaches the brain. Dopamine agonists such
as lisuride are believed to activate dopamine receptors directly
and, therefore, could be taken alone or in combination with
levodopa/ carbidopa therapy. As the disease progresses, other
medications can include monoamine oxidase B, or MAO-B,
inhibitors, such as selegiline, which increase the amount of
available dopamine in the brain and boost the effects of
levodopa; anticholinergics, such as benztropine, which reduce
the relative overactivity of the neurotransmitter acetylcholine
to balance the diminished dopamine activity; and
catechol-O-methyl transferase, or COMT, inhibitors, such as
entacopone, which augment levodopa therapy by inhibiting the
COMT enzyme, which metabolizes levodopa before it reaches the
brain, thereby increasing the amount of levodopa that enters the
brain.
In the early stages of Parkinson’s disease, patients often
experience a favorable response to levodopa or dopamine receptor
agonists, but as the disease progresses these medical treatments
often become less useful, resulting in the occurrence of motor
response complications and “on-off” swings. We believe
that many of the complications associated with current
Parkinson’s disease drug therapy are due to such
medications being taken orally, which can produce rapid
over-stimulation and under-stimulation of dopamine receptors,
hastening the onset of motor response complications and poor
symptom control. As a result, we are pursuing alternative
methods for the delivery of drugs to stimulate dopamine
receptors in the brain, such as lisuride by subcutaneous
infusion and lisuride by transdermal patch, both of which are
designed to provide continuous dopaminergic stimulation that
more closely mimics natural levels of dopamine in the brain. In
addition to convenience, we believe that the pharmacokinetic
properties of lisuride, such as its high potency, short
half-life, and a favorable dermal absorption profile, make it
well-suited for transdermal patch delivery providing continuous
dopaminergic stimulation, controlling the symptoms of
Parkinson’s disease and potentially delaying motor response
complications and “on-off” swings.
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In some advanced cases, brain surgery may be necessary if
Parkinson’s disease is not controlled by oral medications.
A surgical procedure called deep brain stimulation, which has
been approved by the FDA, involves the implantation of
electrodes in the brain, which are connected to a small
electrical device called a pulse generator. This procedure can
reduce “on-off” fluctuations common in advanced
Parkinson’s disease, a byproduct of oscillating levels of
oral levodopa/ carbidopa therapy and oral dopamine agonist
therapy. For advanced Parkinson’s disease patients, many of
whom are elderly and for whom surgery is not a viable option, we
believe that precise dopamine receptor stimulation by
subcutaneous infusion of lisuride using a small, pager-sized,
external pump will provide stable levels of dopamine agonist
that more closely mimic normal levels of dopamine in the brain.
We believe that Lisuride Subcutaneous, if approved, will address
a significant unmet medical need for advanced Parkinson’s
disease patients who do not adequately respond to current
medical treatments, or may not be candidates for surgery.
In addition, the dosage of Parkinson’s disease medications
must be tailored to the individual, as no two persons respond
identically to a particular drug, dosage level or combination of
drugs. We believe that the administration of lisuride via
subcutaneous infusion or transdermal patch will more effectively
allow physicians to treat Parkinson’s disease patients with
varying degrees of symptoms because we believe that these
delivery methods will permit physicians to more effectively
manage the dosage to meet the needs of their individual patients.
Restless Legs Syndrome
Restless Legs Syndrome is a neurological condition that can have
a significant adverse impact on sleep and quality of life. The
condition is characterized by sensory and motor symptoms such as
uncomfortable and unpleasant sensations in the legs that result
in an overwhelming urge to move the legs while at rest.
According to our market research, we believe that Restless Legs
Syndrome may afflict as many as 30 million people worldwide
and there may be as many as 1 million people with Restless
Legs Syndrome severe enough to warrant treatment in the United
States and Canada. Symptoms during sleep can lead to insomnia,
which tends to compound the effects of Restless Legs Syndrome.
Despite the high prevalence rate and considerable impact on
quality of life, few people with Restless Legs Syndrome receive
treatment. Until recently, the pharmaceutical industry has not
focused on the Restless Legs Syndrome market, and as a result,
the awareness and diagnosis of Restless Legs Syndrome has been
low. Dopamine agonists can be effective in the treatment of
Restless Legs Syndrome and in most cases are now considered by
leading practitioners to be first-line treatment, generally used
on an “off-label” basis, meaning that they have been
approved by the FDA for other indications only, such as
Parkinson’s disease. At least five drugs are currently in
development for Restless Legs Syndrome, but to date no drug has
been approved for treatment of Restless Legs Syndrome in North
America.
In addition to recommending certain lifestyle changes and
activities to reduce or eliminate Restless Legs Syndrome
symptoms, physicians also generally choose among, as possible
treatments, dopamine agonists, benzodiazepines (central nervous
system depressants), and narcotics, each on an off-label basis.
Dopamine agonists, largely used to treat Parkinson’s
disease, have been shown in some studies to reduce Restless Legs
Syndrome symptoms and are currently considered the initial
treatment of choice. Promising short-term results of treatment
with levodopa plus carbidopa have also been reported, although
most patients eventually will develop augmentation, meaning that
symptoms begin to develop earlier in the day and with greater
severity. Dopamine agonists such as lisuride may be effective
for the treatment of Restless Legs Syndrome. We believe that a
Lisuride Transdermal patch will provide an effective and more
convenient weekly therapy to control the symptoms of Restless
Legs Syndrome and to deliver continuous dopaminergic
stimulation. It is possible that continuous dopaminergic
stimulation may produce less augmentation over time.
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Historical studies with Lisuride Subcutaneous
Lisuride Subcutaneous pilot study
In 1992, an NIH-sponsored, pilot study in seven patients with
advanced Parkinson’s disease was conducted to investigate
the effects of long term, continuous administration of lisuride
on motor response complications arising from levodopa therapy.
After a three month continuous infusion of lisuride, the
duration of anti-parkinsonian action of levodopa increased by
approximately 90%, and the period of time during which levodopa
effectively controlled the symptoms associated with
Parkinson’s disease increased by approximately 300%. These
benefits were more than three times greater than those produced
by continuous levodopa administration alone. The investigators
concluded that these results lend further support to the view
that continuous, stable dopamine replacement reduces motor
fluctuations and peak dose dyskinesias that complicate standard
levodopa regimens, and that motor response complications tend to
normalize with the more physiological stimulation afforded by
continuous replacement strategies, such as lisuride infusion.
Lisuride Subcutaneous versus conventional therapy
In 2002, a clinician-sponsored, prospective, four-year clinical
trial comparing 40 Parkinson’s disease patients
randomized to receive Lisuride Subcutaneous versus conventional
therapy with oral levodopa and dopamine agonists was presented.
In a prospective study, data is gathered over time according to
a detailed protocol, beginning at time zero, as opposed to a
retrospective study, which looks at data previously gathered.
Patients receiving Lisuride Subcutaneous infusions in this study
experienced a statistically significant reduction in both motor
fluctuations and dyskinesia compared with patients receiving
standard dopaminergic therapies (p<0.0001). Benefits
persisted for the duration of the study. As shown in
Chart D below, patients on lisuride experienced
parkinsonian symptoms (i.e., were not responding to therapy) for
approximately 1 hour per day, whereas patients on
conventional therapy were parkinsonian for approximately 4 to
5 hours per day. Moreover, patients on lisuride remained
stable over time, whereas patients on conventional therapies
slowly deteriorated. Physician-sponsored clinical studies and
compassionate use across Europe in over 450 patients
support the conclusion that lisuride is safe and effective for
continuous subcutaneous infusion via an external mini pump to
control the symptoms of advanced Parkinson’s disease, prior
to, or delaying the need for, more radical surgical intervention.
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Historical studies with Lisuride Transdermal
Lisuride Transdermal in Parkinson’s disease
In 2003, a small proof of concept study of Lisuride Transdermal
was conducted in Europe for the treatment of Parkinson’s
disease in eight patients with unpredictable “on-off”
phenomena, a disabling complication of Parkinson’s disease
for which there is currently no good treatment. In this study,
patients were treated with Lisuride Transdermal patches as an
add-on to their pre-existing medications. Treatment duration was
for up to eight days. The intensity and frequency of motor
fluctuations was calculated based on the patient’s self
rating of motor function (the Motor Changing Rate, or MCR). As
shown in Chart E below, application of the Lisuride
Transdermal patch improved MCR compared to baseline scores and
this effect was determined to be statistically significant
(p<0.023; intra-group versus baseline). Observed side
effects of the Lisuride Transdermal patch included local,
transient skin reactions at the application site. One of these
patients experienced skin irritations beyond the patch
application site. The results of this proof of concept study
provided preliminary evidence to support the safety,
tolerability and efficacy of Lisuride Transdermal delivery in
the treatment of motor complications.
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Lisuride Transdermal in Restless Legs Syndrome
In 2004, the results of a proof of concept study conducted in
Europe by NeuroBiotec investigating the safety and efficacy of
Lisuride Transdermal in patients with severe, idiopathic, or of
unknown origin, Restless Legs Syndrome were presented at the
annual meeting of the Associated Professional Sleep Societies.
In this pilot study of 10 patients with severe Restless
Legs Syndrome, those who responded to open-label Lisuride
Transdermal treatment after two weeks were randomized to receive
either Lisuride Transdermal patch treatment or a placebo patch
for an additional week. The results of the study provided
preliminary evidence to support our belief that Lisuride
Transdermal patches reduced the severity of Restless Legs
Syndrome and improved the quality of sleep in patients with
severe idiopathic Restless Legs Syndrome. The observed adverse
side effects were consistent with the known side effect profiles
of other dopamine agonists (such as nausea, vomiting and
headaches) and other transdermal delivery technologies (such as
skin reactions). The severity of the symptoms throughout the day
were markedly reduced.
Lisuride ongoing clinical trials
Lisuride Subcutaneous
Our collaborator NeuroBiotec has completed enrollment of a
multi-center, placebo-controlled Phase III trial in 331
patients in Europe for the use of Lisuride Subcutaneous in the
treatment of advanced Parkinson’s disease. We intend to use
the results of these European trials in the design of our own
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Phase III clinical trials in the United States, which we
expect to begin in early 2006 after the submission of an IND. We
also plan to submit the NeuroBiotec results as supportive data
in our FDA registration package. We plan to seek orphan
drug and fast track status for Lisuride Subcutaneous for
advanced Parkinson’s disease.
Lisuride Transdermal
We have completed three Phase I clinical trials outside the
United States, in a total of 54 healthy volunteers, using
Lisuride Transdermal. These trials have documented the dose
relationship, influence of different sites of application,
adhesivity and local tolerability of Lisuride Transdermal.
Notably, a Phase I pharmacokinetic study in volunteers not
suffering from Parkinson’s disease or Restless Legs
Syndrome provided evidence to support that therapeutic levels of
lisuride were maintained over seven days with the Lisuride
Transdermal patch. NeuroBiotec has also completed a
Phase II/III double-blind, placebo-controlled, dose-ranging
study using three different sizes of a Lisuride Transdermal
patch in 240 patients with moderate to severe idiopathic
Restless Legs Syndrome. The treatment duration in this trial was
12 weeks, and the primary clinical endpoint was change in
the International Restless Legs Syndrome, or IRLS, score.
Following the completion of the trial, a long-term treatment
extension was offered to the patients and is ongoing.
NeuroBiotec has also enrolled a Phase II/III European study
of Lisuride Transdermal in Parkinson’s disease, which is
ongoing, and the results are expected to be available in the
second half of 2005. We intend to begin United States
development of Lisuride Transdermal with an IND submission in
the second half of 2005 for both Parkinson’s disease and
Restless Legs Syndrome. Our plan is to initiate our United
States clinical program by conducting Phase III clinical
trials in the United States in parallel with our European
trials. We ultimately intend to conduct a global clinical
program with NeuroBiotec and to share study results for our
respective drug applications.
Commercialization of lisuride
We believe that we will be well positioned to effectively launch
Lisuride Subcutaneous for advanced Parkinson’s disease and
Lisuride Transdermal for Parkinson’s disease and Restless
Legs Syndrome. We currently expect, assuming development
progresses as currently anticipated and FDA approval is
received, to launch Lisuride Transdermal and Lisuride
Subcutaneous, at the earliest, in 2008 and 2009, respectively.
This will allow our sales and marketing organization time to
more fully develop, with the benefit of experience in the United
States and Canada selling tetrabenazine to the movement disorder
community and high-prescribing neurologists that we expect will
also be likely to prescribe lisuride. By the time we believe we
will be able to market Lisuride Subcutaneous and Lisuride
Transdermal, we also expect to have extensive distribution
experience in the movement disorders market with specialty
pharmacies. We believe that this approach will allow our sales
and marketing team to facilitate reimbursement as well as
patient training and support, which we believe will lead to
enhanced acceptance, success and ongoing use of Lisuride
Subcutaneous and Lisuride Transdermal following launch.
We intend to choose a manufacturer prior to filing an IND with
respect to Lisuride Subcutaneous in late 2005. The mini-pump
mechanism for delivery of the product will be a 510(k) cleared
external infusion pump for subcutaneous infusion. Although we
are considering different varieties of pumps from different
manufacturers, and we have tested multiple versions of a pump,
we have not entered into any agreement for the supply of the
pumps, but do not expect to experience any problems in obtaining
sufficient supplies of a pump.
Other indications
In addition to Parkinson’s disease and Restless Legs
Syndrome, we may also seek to expand the approved uses of
lisuride to include other potential indications that respond to
dopamine agonists, such as hyperprolactinemia, a disorder
resulting from increased levels of the hormone prolactin, and in
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the prevention of migraines. Prolactin is involved in
stimulating the production of breast milk in women and decreases
the production of testosterone in men. Oral lisuride is
currently approved in certain European countries for both
hyperprolactinemia and the prevention of migraines. We believe
that the Lisuride Transdermal patch, due to its predictable and
stable kinetic profile, may potentially provide significant
benefits for both of these treatment applications.
Dopamine agonists inhibit prolactin secretion with no reported
effect on other pituitary hormones and are therefore generally
the drugs of choice for hyperprolactinemia. However, recent
studies indicate that commonly used dopamine agonists for
hyperprolactinemia, such as cabergoline and bromocriptine, may
eventually lead to heart damage, due to their agonist effects at
the 5-HT2b receptor. Lisuride, in addition to being a
potent dopamine agonist, is a 5-HT2b antagonist,
and thus Lisuride Transdermal may provide a safe and effective
alternative for the treatment of hyperprolactinemia.
Many commonly used migraine drugs are also believed to act, in
part, as 5-HT2b antagonists. Published data
exists that lisuride may be a safe and effective therapy in the
prevention of migraines, a significant unmet medical need in the
United States and Canada. We currently plan to pursue the
indications of hyperprolactinemia and migraines, either through
our own development efforts or through one or more
collaborations, after development of Lisuride Transdermal has
been initiated in the United States for the treatment of
Parkinson’s disease and Restless Legs Syndrome.
D-SERINE
Product overview
We are developing D-Serine, an oral, selective amino acid
co-agonist that along with another amino acid, glycine,
stimulates the activation of the N-methyl-D-aspartic acid
(NMDA) receptor in the brain. We acquired worldwide
development and commercial rights under certain patent
applications and patents directed to D-Serine for its use in a
number of neurological indications, including schizophrenia,
Alzheimer’s disease and autism, from Massachusetts General
Hospital and Glytech, Inc. Published data from multiple
physician-sponsored Phase IIa clinical trials conducted in
Israel and Taiwan support the efficacy of D-Serine in treating
schizophrenic patients when combined with current therapies.
After submitting an IND for D-Serine, which we expect to occur
in the second half of 2005, we intend to initiate our
United States clinical trial program with a Phase I
trial. Following this trial, we will seek to reproduce the
results of the these Phase IIa trials in a broad
Phase IIb clinical trial in the United States in 2006.
Market overview
According to the United States Surgeon General, approximately
1.3% of the United States population develops schizophrenia
during their lifetime, suggesting that more than 2 million
people in the United States may suffer from schizophrenia in a
given year. According to Frost & Sullivan, the United States
prescription antipsychotic market for the treatment of
schizophrenia exceeded $6 billion in 2004. Schizophrenia is
a chronic, severe, disabling CNS disorder that usually occurs in
patients between their late teens and late twenties, with the
disease generally occurring earlier in men than in women.
Schizophrenia is characterized by hallucinations and delusions,
which are called “positive” symptoms because they
indicate the presence of abnormal mental functions rather than
the absence of normal mental functions; apathy, depression, and
social withdrawal, which are called “negative”
symptoms; and general cognitive dysfunction that results in
disorganized speech and behavior.
Researchers have yet to determine the underlying causes of
schizophrenia. Problems with brain structure and chemistry are
thought to play a role, and there appears to be a strong genetic
component, but most researchers believe that environmental
factors may also contribute. Medications do exist for the
treatment of symptoms associated with schizophrenia but are
effective only on some symptoms and often cause adverse side
effects. For example, current therapies, such as antipsychotic
medicines, may be effective in treating the positive symptoms
but are less effective in treating the
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negative symptoms and cognitive deficits associated with the
disease. For decades, schizophrenia was thought to be solely
linked to levels of dopamine in the brain. Recent evidence
suggests, however, that a disturbance in dopamine levels is just
one factor in the pathophysiology of schizophrenia, and that for
many patients, the main abnormalities lie elsewhere, such as
deficiencies in the transmission of the excitatory
neurotransmitter glutamate. Scientists now believe that
schizophrenia affects virtually all parts of the brain and that,
unlike dopamine, which plays an important role only in isolated
regions, glutamate is critical virtually everywhere in the
brain. As a result, investigators are searching for treatments
that can reverse the underlying glutamate deficit. In recent
years, a growing body of evidence has suggested that
understimulation of the NMDA-type glutamate receptor in the
brain’s cortex is central to schizophrenia and may underlie
the negative symptoms and the cognitive deficits of the disease.
We believe that a product candidate such as D-Serine that
stimulates the NMDA receptor may be effective for the treatment
of the positive symptoms, negative symptoms and cognitive
deficiencies associated with schizophrenia and therefore may be
successful when added to current medications that more
specifically treat the positive symptoms of schizophrenia.
D-Serine clinical trials
A physician-sponsored Phase IIa placebo-controlled six week
study conducted in Taiwan in 28 patients provided
preliminary data to support that D-Serine, when administered in
conjunction with antipsychotic medications, compared to
antipsychotic medications alone, can improve the positive
symptoms, negative symptoms and cognitive deficits of
schizophrenic patients. In this study, patients in the D-Serine
treatment group experienced statistically significant
(p<0.05) improvements in positive, negative, and cognitive
symptoms at weeks 2, 4, and 6 of the study compared to
patients on antipsychotic medications alone. These results have
been replicated in a second physician-sponsored pilot study
conducted in Israel where 39 schizophrenic patients undergoing
treatment with the antipsychotics risperidone or olanzapine
participated in a double-blind, placebo-controlled, six-week
crossover trial with 30 mg/kg/day D-Serine added to their
antipsychotic medication. D-Serine administration induced
increased serine serum levels (p<0.001) and resulted in
significant improvements in positive, negative, cognitive, and
depression symptoms, as measured by the Positive and Negative
Syndrome Scale (p<0.001). For approximately one third of the
sample, D-Serine treatment resulted in significant (>20%)
reductions in Brief Psychiatric Rating Scale total scores. In
both studies, patients tolerated oral doses of D-Serine well.
We plan to submit an IND for D-Serine in late 2005. After
submitting the IND, we will conduct a Phase I trial.
Following this trial, we will seek to reproduce the results of
the Phase IIa trials in a larger Phase IIb trial of
our own in the United States, expanding the course of therapy
from six weeks to twelve weeks. Assuming our development
progresses as expected, we believe we could be in position to
submit an NDA by the end of 2009 for D-Serine as an add-on
therapy to current medications for the treatment of
schizophrenia. By pursuing the development of D-Serine as add-on
therapy, rather than a stand-alone product candidate, we believe
that this will allow us to complete our Phase III program
more rapidly and at less cost. Given the major medical need for
drugs that can improve the negative symptoms and cognitive
deficits associated with schizophrenia, we intend to seek fast
track designation from the FDA for our application.
Mechanism of action
D-Serine stimulates the NMDA receptor in the brain, which has
been implicated in the pathophysiology of cognitive disorders
such as schizophrenia, Alzheimer’s disease and autism. The
NMDA receptor plays a critical role in brain development,
memory, and normal brain function by selectively amplifying key
neural signals and helping the brain to respond to some messages
and ignore others, thereby facilitating mental focus. NMDA
receptors also participate in the regulation of dopamine
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release, and the blocking of NMDA receptors produces the same
disturbances of dopamine function typically seen in patients
with schizophrenia. Understimulation of the NMDA receptor,
alone, may explain both the negative and cognitive symptoms
associated with schizophrenia, as well as the dopamine
abnormalities which are thought to be the root cause of the
positive symptoms. Studies have shown that D-Serine is enriched
in the forebrain, areas that are also rich in the NMDA receptor.
Furthermore, studies have demonstrated that serum and brain
levels of D-Serine in patients with schizophrenia are
significantly lower than those of healthy people.
Commercialization and partnering of D-Serine
Psychiatrists are the primary caregivers for the schizophrenic
patient population. There are approximately 30,000 psychiatrists
in the United States and Canada. However, according to NDC
Health, a medical information provider, 75% of the prescriptions
for neuroleptic antipsychotic medications written by
psychiatrists are written by less than 8,000 physicians.
Assuming FDA approval of tetrabenazine, we intend to develop
relationships with these high prescribers through our marketing
of tetrabenazine for the treatment of chorea associated with
Huntington’s disease and eventually tardive dyskinesia. In
Canada, Nitoman is already approved for tardive dyskinesia, and
we already target and call on high-prescribing psychiatrists in
Canada. We believe that this targeting and promotional
efficiency should provide us with a good opportunity, if
D-Serine is approved, to develop the market and effectively
launch D-Serine for schizophrenia with high prescribing
psychiatrists and key opinion leaders. However, the nature of
the market opportunity, including primary care physician
targets, may also present us with opportunities to partner
D-Serine in the United States and Canada by collaborating with
companies with larger sales forces. We also plan to seek
commercial collaborators in Europe and Asia for the
commercialization of D-Serine.
We intend to develop D-Serine through Phase IIb clinical
trials to confirm the safety and efficacy data generated by
investigator-sponsored Phase IIa data. We believe that, if
the results of our larger Phase IIb clinical trials are
consistent with the Phase IIa data, we should be in a
position to partner with a large pharmaceutical company for the
worldwide development and potential commercialization of
D-Serine for the treatment of schizophrenia.
Other potential indications
Autism is a complex developmental disability that affects
learning, social interaction and communication. There is
currently no effective treatment for autism. Several reports
have suggested that the NMDA-glycine system in the frontal
cortex of the brain may be involved in the genesis and symptoms
of autism, and that disruption of the transmission of glutamate
in the cortex may be the primary biochemical abnormality
underlying autism. Low doses of glutamate, acting at the NMDA
receptor, have been shown to increase dendritic arborisation, or
the formation of a treelike growth (which is defective in
autistic patients), learning (which is defective in autism), and
memory. In a recent pilot study of 10 children with autism,
conducted in the United States, D-Cycloserine, an analog of
D-Serine, was shown to have a statistically significant effect
in improving symptoms (p<0.02). However, D-Cycloserine
toxicities and its inverted U-shape dose-response curve have
limited its clinical utility to date. As a result, we believe
that D-Serine may have the potential to more safely and
effectively treat autism.
Alzheimer’s disease is a progressive, neurodegenerative
disorder that is associated with a global impairment of higher
mental function, with loss of memory being the primary symptom.
Several lines of evidence suggest that a dysfunction in
glutamate transmission via the NMDA subtype of glutamate
receptors might be involved in the pathophysiology of
Alzheimer’s disease. It has been reported that NMDA
receptors are selectively and differentially decreased in areas
of the brain with Alzheimer’s disease, suggesting that the
disease might be associated with a loss of NMDA receptors in
selected brain regions. In a recent investigator-sponsored
study, it was demonstrated that serum levels of
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D-Serine in patients with Alzheimer’s disease were
decreased in comparison to those of healthy people and may
result in the inadequate functioning of the NMDA receptor in
patients with Alzheimer’s disease. Therefore, we believe
that D-Serine may also play a possible role in the
pathophysiology of Alzheimer’s disease and its treatment.
We currently plan to pursue D-Serine for the treatment of autism
and Alzheimer’s disease either through our own development
efforts or through collaboration and partnership arrangements,
after we have submitted the IND for schizophrenia and made
substantial progress in early clinical studies in the United
States.
PPI-03306
Product overview
PPI-03306 is a small molecule that selectively modulates a key
enzyme involved in the synthesis of serotonin. Serotonin is a
chemical neurotransmitter implicated in the regulation of sleep
cycles. PPI-03306 is a product candidate in early development
for the treatment of sleep apnea, a disorder characterized by
interrupted breathing during sleep. There are currently no
FDA-approved drugs to treat sleep apnea. We have in-licensed
exclusive worldwide rights to develop and commercialize
PPI-03306 for the treatment of sleep apnea as well as certain
other neurological conditions. In one study conducted
outside the United States in patients with anxiety, the active
ingredient in PPI-03306 was observed in one patient to have
beneficial effects in the control of symptoms related to sleep
apnea.
We have commenced a development program in Europe to evaluate
whether PPI-03306 is effective for the treatment of sleep apnea.
We expect to release the results of a placebo-controlled
Phase II trial in this program in the fourth quarter of
2006.
Market overview
Sleep apnea is a common sleep disorder, afflicting as many as
30 million people worldwide. Sleep apnea is characterized
by brief interruptions in breathing (approximately 10 to 30
seconds at a time) during sleep. These short stops in breathing
can occur as often as hundreds of times every night, leading to
disrupted sleep, daytime sleepiness and impaired quality of
life. Sleep apnea has also been shown to increase the risk of
heart attack and hypertension. There are three types of sleep
apnea: obstructive, central, and mixed. Of the three types,
obstructive sleep apnea is the most common and is caused by a
blockage of the airway, usually when the soft tissue in the rear
of the throat collapses and closes during sleep. In central
sleep apnea, the airway is not blocked, but the brain fails to
signal the muscles to breathe due to the progressive loss of a
small group of nerve cells in the brain. Mixed sleep apnea, as
the name implies, is a combination of obstructive and central
sleep apnea. The cause of sleep apnea remains unknown, and there
is currently no validated animal model of the disease, making it
very difficult to study the underlying causes of the disease and
discover a pharmacologic therapy.
Today, the only FDA-approved treatment for sleep apnea is the
application of a nasal CPAP mask that is worn over the nose
during sleep, and uses pressure from an air blower to force air
through the nasal passages. The air pressure is adjusted so that
it is just enough to prevent the throat from collapsing during
sleep. Because it is uncomfortable, many patients with sleep
apnea refuse to wear it despite the severe medical consequences.
The only other existing treatments specifically for people with
sleep apnea involve surgery, such as the removal of excess
tissue in the back of the throat, or a tracheotomy, in which a
small hole is made in the windpipe and a tube is inserted into
the opening that is kept open during sleep so that air flows
directly into the lungs, bypassing any upper airway obstruction.
There are currently no other FDA-approved medical treatments for
sleep apnea.
PPI-03306 clinical trials
The active ingredient in PPI-03306 was originally in development
in Europe for the treatment of anxiety. Extensive preclinical
and toxicology work have been conducted on the active ingredient
in
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PPI-03306. Additionally, a total of eight clinical trials were
conducted with the active ingredient in PPI-03306 for another
CNS indication (anxiety) involving 528 healthy volunteers
and patients, leading to two publications in peer-reviewed
journals. While the active ingredient in PPI-03306 was shown to
be well tolerated in humans, a lack of substantial efficacy in
treating anxiety led to discontinued development. However, it
was observed by chance to reduce the effects of sleep apnea in
one of the patients in one of the trials.
Given the large size of the market, the unmet need for medical
treatments, and what we believe will be the relatively low cost
to confirm efficacy in patients, we have designed a small
placebo-controlled trial with PPI-03306 to try to confirm the
prior observation that it reduces the number of episodes of
sleep apnea. We believe that we may be able to evaluate the
clinical efficacy of PPI-03306 in sleep apnea in our planned
Phase II clinical trials with as few as 20 to
30 patients, since sleep apnea episodes are easily measured
by a sleep electroencephalogram, which detects abnormalities in
the electrical activity of the brain during sleep. If we are
able to confirm this observation, we would consider entering
into collaboration agreements or initiating an expanded
development program that could ultimately lead to further
clinical trials and the submission of an NDA.
SALES AND MARKETING
In late 2004, we began promoting Nitoman in Canada through a
sales team comprised of a regional director, three sales
representatives, and a medical science liaison specialist.
Beginning in the first quarter of 2005, Phase 4 Health, a
Canadian specialty pharmacy, has been filling prescriptions for
Nitoman in Canada. Phase 4 Health provides patients with
reimbursement assistance, patient counselling and a compliance
program. Additionally, Phase 4 Health manages product
sampling to encourage new patients to try the product. As of
March 2005, we have had the benefit of advice from Phase 4
Health regarding the marketing and supply of Nitoman in Canada.
With the assistance of Phase 4 Health, we intend to refine
the retail marketing and supply of Nitoman in Canada
approximately three months prior to our expected United
States launch of tetrabenazine. We believe that this will allow
us to better control the distribution of Nitoman in Canada and
reduce potential importation of Nitoman into the United States.
Taking advantage of our experience commercializing Nitoman in
Canada, we will be expanding our United States sales and
marketing organization to support the anticipated commercial
launch of tetrabenazine in the United States, which could begin
as early as the first half of 2006. We intend to distribute
tetrabenazine exclusively through specialty pharmacies in the
United States and to use specialty pharmacy distribution for a
number of our additional pipeline product candidates.
Our United States and Canadian sales and marketing organization
is led by our senior director of commercial operations, who has
15 years of experience in sales and marketing at large
pharmaceutical and biotechnology companies. We are also building
an internal marketing organization that will be responsible for
executing the tetrabenazine marketing plan, establishing
pre-launch awareness of tetrabenazine through educational
programs and supporting our sales force. As shown in the
“sales force targeting strategy” pyramid below, our
domestic sales representatives will initially target the
approximately 800 movement disorder specialists who treat
substantially all of the movement disorder patients in the
United States and Canada, but as we launch new indications for
tetrabenazine and our other product candidates, if and when
approved, our sales force will expand its focus on the physician
community to include a greater number of high-prescribing
neurologists and psychiatrists, in addition to movement disorder
specialists. We intend to launch tetrabenazine in the United
States with a sales force of approximately 24 sales
representatives, which we believe will be able to effectively
access the vast majority of the potential prescribers of
tetrabenazine. In addition, we intend to conduct continuing
medical education programs, medical symposia, and regional
speaker programs aimed at developing the market and establishing
awareness of tetrabenazine in the physician community. We intend
to increase the size of our domestic sales force, as necessary,
once tetrabenazine gains market
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acceptance and as we launch expected additional indications and
product candidates in the future, particularly those product
candidates that will compete in markets with larger physician
audiences.
LICENSING AGREEMENTS AND COLLABORATIONS
Tetrabenazine
We hold commercialization rights to tetrabenazine products in
the United States and Canada through two separate agreements
with Cambridge.
United States
Under our current United States agreement with Cambridge, we
have an exclusive license to develop and commercialize an oral
formulation of tetrabenazine tablets in the United States. In
consideration of the rights granted to us, we share net revenues
of tetrabenazine tablets equally with Cambridge. Cambridge is
obligated to supply, and we are obligated to purchase from
Cambridge, all of our requirements of tetrabenazine tablets for
sale in the United States. In addition, we are subject to
minimum sales and order quantities during each year of the term.
If a dispute arises with respect to such minimum order or sales
quantities and such dispute is not resolved by the parties or by
arbitration, the then-current minimum order or sales quantities
are subject to automatic escalation. The amount of the automatic
escalation is substantial, up to 25%, year over year, for
disputes that arise during the first three years following the
effective date. Additionally, Cambridge may elect to cease
supplying us with tetrabenazine tablets on at least six
months’ notice. During the term of the agreement and for at
least a 12 month period after termination, the agreement
prohibits us from engaging in, or assisting third parties to
engage in, during the term of the agreement, product development
or commercialization activities for other tetrabenazine
products, products containing active substances similar to
tetrabenazine, or products for the treatment of hyperkinetic
movement
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disorder symptoms that are treatable with tetrabenazine.
Cambridge also is prohibited, during the term of the agreement,
from engaging in, or assisting third parties to engage in,
product development or commercialization activities for other
tetrabenazine products, products containing active substances
similar to tetrabenazine, or products for the treatment of
hyperkinetic movement disorder symptoms that are treatable with
tetrabenazine other than the product provided by Cambridge or
certain related compounds. If Cambridge wishes to develop one or
more such related compounds or a new formulation of
tetrabenazine, we may obtain exclusive commercialization rights
to the new compound or formulation in the United States by
sharing certain development costs incurred by Cambridge.
However, if we do not choose to share such development costs,
Cambridge may independently develop such compound or formulation
without further obligation to us.
The term of the United States agreement extends until
15 years after the date of the last marketing approval we
obtain for a covered product, unless otherwise terminated
earlier in accordance with its terms. Cambridge may terminate
the agreement in certain circumstances, some of which are
described in greater detail in “Risk factors —
Risks related to our intellectual property — We rely
extensively on compounds and technology licensed from outside
parties and termination of any of those licenses would prevent
us from marketing our product candidates.” In addition,
either party may terminate the agreement under certain
circumstances, including a material breach of the agreement by
the other.
Canada
In April 2004, we entered into a distribution agreement with
Cambridge under which we received exclusive rights to distribute
Nitoman tablets in Canada. Cambridge has licensed the rights to
Nitoman from Life Health Limited, which owns the drug
identification number for Nitoman. Under our agreement with
Cambridge, Cambridge is obligated to supply, and we are
obligated to purchase exclusively from Cambridge, all of our
requirements of Nitoman tablets. We pay Cambridge a fixed price
per unit for an initial quantity of tablets ordered during each
12 month period beginning on April 26. With respect to any
further orders during that year, Cambridge receives an amount
equal to the greater of: (i) a fixed price, and
(ii) 50% of net product revenues on a per unit basis. In
2004, we paid approximately $1.7 million to Cambridge. We
are subject to annual minimum sales and order quantities, which
quantities have been set for only the first five years of the
term and are subject to adjustment by the parties. If a dispute
arises with respect to such minimum order or sales quantities
and such dispute is not resolved by the parties or by
arbitration, the then-current minimum order or sales quantities
are subject to automatic escalation. The amount of the automatic
escalation is substantial, up to 15%, year over year, for
disputes that arise during the first three years following the
effective date. Moreover, either party may request an annual
adjustment of the minimum sales and order quantities. The
optional annual adjustments are subject to automatic escalation
if the parties fail to agree on the adjusted amounts as
described above. Additionally, Cambridge may elect to cease
supplying us with Nitoman on at least six months’ notice.
Finally, the agreement restricts both us and Cambridge from
engaging in certain competitive product development activities
in a manner similar to that prohibited by the United States
license agreement for tetrabenazine.
The term of the agreement continues until ten years after the
date of the last marketing approval we obtain in Canada
pertaining to the product, unless otherwise terminated earlier
in accordance with its terms. Either party may terminate the
agreement under certain circumstances, including a material
breach of the agreement by the other, and Cambridge may
terminate the agreement in certain additional circumstances
described in the “Risk factors — Risks related to
our intellectual property — We rely extensively on
compounds and technology licensed from outside parties and
termination of any of those licenses would prevent us from
marketing our product candidates.”
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Lisuride
In September 2003, we entered into a Development and
Commercialization License and Clinical Supply Agreement with
NeuroBiotec for exclusive rights to sell or have sold and import
or have imported, in the United States and Canada, human
pharmaceutical lisuride products formulated for transdermal,
subcutaneous, intravenous, and other non-oral sustained release
administration. Under the agreement, we also have non-exclusive
rights to manufacture and use such products for the purpose of
selling such products in the United States and Canada. In order
to retain our exclusive rights under the NeuroBiotec license we
must timely satisfy the applicable marketing objectives, which
are to be defined in the future. Our licensed rights include
five pending United States patent applications relating to
certain transdermal formulations of lisuride, methods of using
such formulations, as well as rights to other NeuroBiotec
intellectual property, including all clinical data which we
would submit to the FDA. In consideration for the license, we
have made payments aggregating $1,950,000 to NeuroBiotec and we
are obligated to pay NeuroBiotec certain payments based upon our
achievement of certain clinical and regulatory milestones, which
could be up to $8.6 million if both the FDA and Canadian
regulatory authorities approve both the transdermal formulated
lisuride product for the treatment of Parkinson’s disease
and the subcutaneous formulated lisuride product for the
treatment of an additional specified Parkinson’s disease
indication. Additional milestone payments would be due if we
develop or commercialize additional lisuride products. Under the
NeuroBiotec license agreement, we are also obligated to pay a
royalty based upon a single-digit percentage of net sales of the
licensed products during a period that runs, on a
product-by-product basis, for at least ten years from first
commercial sale of the product and terminates generally upon the
earlier of fifteen years after that first commercial sale of the
product, the expiration of the exclusivity under the licensed
patents, and the expiration of any exclusive marketing rights
obtained in a country of sale for such product.
Through our agreement with NeuroBiotec, we have obtained access
to certain data and know-how of Schering AG (the original
developer of lisuride). We have also obtained a waiver directly
from Schering of certain rights that Schering otherwise retained
under its agreement with NeuroBiotec, or otherwise, to develop
and sell transdermal and other sustained release lisuride
products in the United States and Canada. We obtained this
waiver through an agreement to which we, NeuroBiotec and
Schering are parties. In consideration of these rights, we also
are obligated to pay single-digit royalties to Schering on net
sales of certain lisuride transdermal products and lisuride
sustained release products, which obligation extends, on a
country-by-country basis, for the ten year period following the
date of first commercial sale of such products in each of the
United States and Canada. The royalty obligations that are due
to Schering are in addition to milestone payments and royalty
obligations payable to NeuroBiotec and apply to sales of ready
to use pharmaceutical specialties for human use containing
lisuride, lisuride hydrogen maleate or active salts or esters
thereof formulated either for transdermal use or for other
non-oral sustained release, without regard to whether such
products are covered or claimed in any patent or patent
application licensed to us.
D-Serine
We have rights under two separate license arrangements that
relate to the development and commercialization of D-Serine. In
October 2000, Prestwick Scientific Capital, Inc., entered into a
worldwide, exclusive license agreement with the Massachusetts
General Hospital. We subsequently acquired this license, which
allows us access to certain patents relating to the treatment of
neuropsychiatric disorders. In consideration for the license,
Prestwick Scientific Capital paid Massachusetts General Hospital
an initial signing fee of $20,000 and we are obligated to pay
future milestone payments, a low double-digit percentage of any
consideration we receive for granting a sublicense of the
licensed technology, and royalties based upon a low single-digit
percentage of net sales of licensed products. The payments based
on sublicense revenue continue as long as we receive
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payments for a sublicense, whereas the royalties based on our
sale of licensed products terminate ten years after the first
commercial sale of any licensed product anywhere in the world
or, if later, on expiration of the last relevant claim of any
licensed patent. The term of the agreement extends until the
expiration of all applicable royalty obligations, unless
terminated earlier in accordance with its terms. Under our
agreement, Massachusetts General Hospital has certain rights to
propose that Prestwick pursue commercial development of an
additional compound under the agreement and to receive a grant
back of rights under the license patents if we decline to
develop such compound.
In September 2004, we entered into an exclusive license
agreement with Daniel C. Javitt and Glytech, Inc. to certain
patents and technology relating to D-Serine and other compounds
that stimulate neurotransmission at NMDA-type glutamate
receptors. With respect to the compound glycine, this license is
subject to the licensors’ retained right to sell glycine
for non-pharmaceutical purposes only, for a period generally
expiring on a country-by-country basis upon our first commercial
sale of a licensed product in the applicable country (except in
the United States, where the retained right has a five-year
minimum term). In consideration for this license, we paid an
initial license fee and have an obligation to pay development
and commercialization milestone payments together with a royalty
based upon a low single-digit percentage of net sales of
licensed products. Our royalty obligations under the agreement
terminate on a product-by-product and country-by-country basis
generally upon the later of the expiration of the licensed
patents or ten years from first commercial sale. Further, Javitt
and Glytech have certain rights under our agreement to propose
that we pursue commercial development of, or license, one or
more additional products covered by the licensed patents and to
receive a right to do so if we decline.
PPI-03306
We obtained rights to certain patent applications covering
PPI-03306 under a license agreement entered into between
Prestwick Scientific Capital, Inc., and Dr. Maurice Gittos
in June 2001, which was contributed to us at the time of our
formation. Under the license agreement, we hold an exclusive
worldwide license to develop and commercialize PPI-03306 for the
treatment of sleep apnea and other neuropsychiatric conditions.
In consideration for the license, we are obligated to pay
development milestones a percentage of revenues received if we
grant sublicense rights under the licensed technology, and
royalties based upon a percentage net sales of licensed
products. Our royalty obligations under the agreement terminate
on a product-by-product and country-by-country basis generally
upon the later of the last to expire of the licensed patents or
any exclusive marketing rights granted under the laws of such
country.
INTELLECTUAL PROPERTY AND PATENTS
Tetrabenazine
In the United States, we have received orphan drug designation
for tetrabenazine for the treatment of Huntington’s disease
and moderate to severe tardive dyskinesia and we intend to seek
orphan drug exclusivity for other product candidates in the
future. Orphan drug exclusivity by the FDA for a particular
product in a particular indication normally provides
seven years of market exclusivity for such active
pharmaceutical ingredient for such indication following the date
of marketing approval by the FDA unless a clinically superior
product comes to market. We have no similar protection in
Canada. We have no patent protection on the composition of
matter of the tetrabenazine compound.
Lisuride
We have in-licensed rights under certain patent applications
relating to lisuride, including methods of using lisuride for
Restless Legs Syndrome, various combination therapies involving
Lisuride Transdermal, and an application directed to a
formulation for Lisuride Transdermal. We have no patent
protection for the composition of matter of the lisuride
compound.
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We are aware of issued United States patents having claims that
cover certain transdermal lisuride formulations and/or the
transdermal use of lisuride. We do not have licenses to these
patents nor do we believe that a license to these patents is
required to develop, commercialize or sell Lisuride Transdermal
as presently formulated. However, if we change the formulation
of Lisuride Transdermal to more than double the currently
expected maximum delivered dose of lisuride, these patents could
affect our ability to develop, commercialize and sell Lisuride
Transdermal. The owners of these patents may initiate a lawsuit
alleging infringement of one of more of these patents and, if
they did, we may not be successful in defending such suits.
Additionally, our ability to develop, commercialize and sell
Lisuride Transdermal could be affected if the formulation of our
product changed with respect to its components, or if we fail to
obtain rights to certain components of the present formulation
of Lisuride Transdermal. Failure to obtain such rights on
commercially reasonable terms could affect our ability to
develop, commercialize and sell Lisuride Transdermal as
presently formulated.
D-Serine
We have in-licensed rights under certain patent applications and
patents relating to the use of D-Serine in the treatment of
schizophrenia. Our license provides us with worldwide exclusive
development and commercialization rights to D-Serine for
psychosis and neuropsychiatric disorders, including
schizophrenia, autism and Alzheimer’s disease. We have no
patent protection for the composition of matter of the D-Serine
compound.
We are aware of one issued United States patent that contains
claims covering subject matter that, if construed broadly, could
restrict our ability to develop, manufacture, and sell our
D-Serine product candidate. We currently have no rights to this
patent. The owner of this patent may initiate a lawsuit alleging
infringement. If a lawsuit is initiated, we have a number of
defenses that we will assert. However, we cannot guarantee that
any such defenses would be successful.
PPI-03306
We have in-licensed rights under certain patent applications
relating to PPI-03306 and the use of PPI-03306 in the treatment
of sleep apnea. Our license provides us with worldwide exclusive
development and commercialization rights to PPI-03306 for sleep
apnea.
In addition, we are aware of one issued United States patent
that contains claims covering subject matter that, if construed
broadly, could restrict our ability to develop, manufacture, and
sell our PPI-03306 product. We currently have no rights to this
patent. The owner of this patent may initiate a lawsuit alleging
infringement. However, this patent should expire before we plan
to commercialize our PPI-03306 product.
For all of our product candidates, we also rely on trade secrets
and proprietary know-how, especially when we do not believe that
patent protection is appropriate or can be obtained. Our
practice is to require our employees, consultants, outside
scientific collaborators, sponsored researchers and other
advisors to execute confidentiality agreements upon the
commencement of employment or other relationships with us. These
agreements generally provide that all confidential information
developed by or made known to the individual during the course
of the individual’s relationship with us is to be kept
confidential and not disclosed to third parties. In the case of
employees, the agreements generally provide that all
discoveries, developments, inventions and other intellectual
property conceived or reduced to practice by the individual
while employed by us will be our exclusive property. In the case
of advisors and consultants, the agreements generally provide
that all discoveries, developments, inventions, and other
intellectual property conceived or reduced to practice by the
individual as a result of performance of services for us and not
resulting from research related to work supported by another
entity with which the individual is party to a confidentiality
agreement, shall be our exclusive
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property. These agreements may not effectively prevent
disclosure of confidential information nor result in the
effective assignment to us of intellectual property, and may not
provide an adequate remedy to us in the event of unauthorized
disclosure of confidential information or other breaches of the
agreements.
COMPETITION
We face, and will continue to face, intense competition from
other pharmaceutical and biotechnology companies, as well as
numerous academic and research institutions and governmental
agencies, both in the United States and abroad. We compete with
existing and new products being developed by our competitors.
Some of these competitors are pursuing the development of
pharmaceuticals that target the same diseases and conditions
that our product development programs target. In addition, we
may face competition from drugs that are approved for other
indications but are being used “off-label” to treat
indications for which we are developing product candidates. In
each of our development programs for product candidates
addressing indications for which there are currently therapies
available, we intend to complete clinical trials designed to
evaluate the potential advantages of our product candidates as
compared to or in conjunction with the current standard of care.
Hyperkinetic Disorders
In the area of hyperkinetic disorders, which tetrabenazine
targets, there are currently no FDA-approved treatments in the
United States. We are aware of products in development that
would target this market, although all such products of which we
are aware are in the early stages of clinical trials.
Additionally, UCB is exploring whether levetiracetum, an
existing drug that has been approved by the FDA for another
indication, could be effective in treating chorea associated
with Huntington’s disease.
Advanced Parkinson’s disease
In the area of advanced Parkinson’s disease, which Lisuride
Subcutaneous is intended to target, there are currently very few
options for patients, consisting of surgical intervention either
through thalamotomy or pallidotomy, where a probe is inserted
into the brain structure and a high frequency energy current is
used to destroy a small area in these regions to better control
tremor or dyskinesias, respectively, or the use of deep brain
stimulation.
Parkinson’s disease
There are a number of products currently FDA-approved for the
treatment of Parkinson’s disease, which Lisuride
Transdermal is intended to target. However, to date only
multi-dose oral or injectable agents have been approved by the
FDA as anti-Parkinson’s therapy. The FDA-approved drugs
include a number of effective dopamine agonists and precursors
like levodopa/carbidopa (Sinemet) which are marketed in oral
dosage forms. Some oral dopamine agonists are being developed in
once-daily extended release dosage forms for oral delivery by
GlaxoSmithKline (ropinirole) and Pfizer (pramipexole).
Additionally, Schwarz Pharma and Aderis Pharmaceuticals have
conducted extensive Phase II clinical trials with a
once-daily transdermal patch administering rotigotine, a new
dopamine agonist, for the treatment of Parkinson’s disease.
While rotigotine is a new dopamine agonist and the patch is a
novel formulation, it is possible that one or more of the
current FDA-approved dopamine agonists could have sufficient
potency and skin permeability to be suitable for formulation
into a patch although we are not aware of programs currently in
this area. There is also considerable effort and investment
being made by biotechnology firms in cell transplantation
approaches to treatment of Parkinson’s disease.
Restless Legs Syndrome
There are currently no FDA-approved drugs for the treatment of
Restless Legs Syndrome in the United States, although there is
significant off-label use of drugs approved for other
indications. Other
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companies are pursuing an indication for Restless Legs Syndrome.
GlaxoSmithKline has received approval to market its drug Requip
in Europe for the treatment of Restless Legs Syndrome and has
submitted a supplemental NDA, or sNDA, which is currently under
review by the FDA, for approval of Requip for the treatment of
Restless Legs Syndrome in the United States. Ropinirole is
already approved for the treatment of Parkinson’s disease
in the United States and Europe. Additionally, Schwarz Pharma is
pursuing a Restless Legs Syndrome indication for rotigotine, and
Pfizer is pursuing a Restless Legs Syndrome indication for
pramipexole, which has already been approved by the FDA for the
treatment of Parkinson’s disease.
Schizophrenia
In the area of schizophrenia, there are many FDA-approved
treatments in the United States, primarily consisting of
neuroleptic antipsychotics such as Zyprexa from Eli Lilly,
risperidol from Johnson and Johnson and Abilify from
Bristol-Myers Squibb. However, we believe that our D-Serine
product will be complementary to these products, rather than
directly competitive.
Sleep Apnea
The only currently effective treatment for sleep apnea is CPAP.
Provigil, a psychostimulant marketed by Cephalon, has been shown
to improve daytime vigilance and therefore may reduce the
effects of sleep apnea, but the drug does not directly treat the
causes of sleep apnea.
In addition, the companies described above and other competitors
may have a variety of drugs in development or awaiting FDA
approval that could reach the market and become established
before we have a product to sell. Our competitors may also
develop alternative therapies that could further limit the
market for any product candidates that we may develop. Many of
our competitors and their collaborators have significantly
greater experience than we do in preclinical and clinical trials
of potential pharmaceutical products; and obtaining FDA and
other regulatory clearances.
In addition, many of our competitors and their collaborators
have substantially greater advantages in the following areas:
--
capital resources;
--
research and development resources;
--
regulatory expertise;
--
obtaining and maintaining
protection of intellectual property;
--
experience in obtaining
reimbursement and securing approval for placement in formularies;
--
manufacturing
capabilities; and
--
sales and marketing.
Smaller companies also may prove to be significant competitors,
particularly through proprietary research discoveries and
collaborative arrangements with large pharmaceutical and
established biotechnology companies. Many of our competitors
have products that have been approved or are in advanced
development. We face competition from other companies, academic
institutions, governmental agencies and other public and private
research organizations for collaborative arrangements with
pharmaceutical and biotechnology companies, in recruiting and
retaining highly qualified scientific and management personnel
and for licenses to additional technologies. Our competitors,
either alone or with their collaborators, may succeed in
developing technologies or drugs that are more effective, safer,
and more affordable or more easily administered than ours and
may achieve patent protection or commercialize drugs sooner than
we can. Developments by others may render our drug candidates or
our technologies obsolete. Our failure to compete effectively
could have a material adverse affect on our business.
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MANUFACTURING
We do not currently own or operate manufacturing facilities and
have no experience in manufacturing pharmaceutical products. We
rely and expect to continue to rely on outside parties to
produce all clinical and commercial quantities of our product
candidates. There can be no assurance that our product
candidates, if approved, can be manufactured in sufficient
commercial quantities, in compliance with regulatory
requirements and at an acceptable cost. Although there are
several potential manufacturers capable of manufacturing our
product candidates, we intend to select and rely initially on
one party to manufacture each of our product candidates, if and
when approved. Our contract manufacturers are subject to
extensive governmental regulation. Our contract manufacturers
must ensure that all of the processes, methods and equipment are
compliant with the current Good Manufacturing Practices, or cGMP
on an ongoing basis, mandated by the FDA and other regulatory
authorities, and conduct extensive audits of vendors, contract
laboratories and suppliers.
Tetrabenazine. Under the terms of our agreements with
Cambridge we are required to purchase from Cambridge all of our
requirements of tetrabenazine. If Cambridge is unable to supply
us with sufficient quantities of the drug, we may not have
rights to access Cambridge’s know-how relating to the
manufacture of the product. The manufacturing of this drug is
relatively simple and, accordingly, we do not believe that it
would be difficult to find a manufacturer to replace Cambridge,
if necessary, although we could experience a temporary delay in
securing alternative manufacturing and we may receive less
favorable pricing from the alternative manufacturer.
Lisuride Subcutaneous. Ivax currently manufactures
lisuride powder, which is then used in reconstitution and
commercial packaging. IDT currently manufactures lisuride
solution and packages it in the commercial vials. The mini-pump
mechanism for delivery of the product will be a 510(k) cleared
external infusion pump for subcutaneous infusion. We currently
have not selected a manufacturer for the pump that we would use
in developing and commercializing Lisuride Subcutaneous.
Although we are considering different varieties of pumps from
different manufacturers, we have not entered into any agreement
for the supply of a pump, but do not expect to experience any
problems in obtaining sufficient supplies of a pump.
Lisuride Transdermal. We have selected Novosis as our
manufacturer for Lisuride Transdermal. Ivax currently
manufactures lisuride powder, which is then used by Novosis in
the manufacture of the patch. We believe that we may have a
competitive advantage because lisuride and the patch are
relatively difficult to manufacture. However, this may also make
it difficult and costly for us to find alternate manufacturing
sources if our contract manufacturers are unable to meet our
needs.
D-Serine and PPI-03306. We have selected manufacturers
for our supplies of D-Serine and PPI-03306 for clinical trials.
These products are relatively simple to manufacture and we do
not foresee any difficulties in obtaining alternative
manufacturing sources to produce them in sufficient quantities
if our current contract manufacturers are unable to meet our
needs.
GOVERNMENTAL REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in foreign countries
impose substantial requirements upon the clinical development,
manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate
research and development activities and the testing,
manufacture, quality control, safety, effectiveness, labeling,
storage, record keeping, approval, advertising and promotion of
any products we commercialize.
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United States
The process required by the FDA before product candidates may be
marketed in the United States generally involves the following:
--
preclinical laboratory and animal
tests;
--
submission of an investigational
new drug application, or IND, which must become effective before
clinical trials may begin;
--
adequate and well-controlled human
clinical trials to establish the safety and efficacy of the
product candidate for its intended use;
--
pre-approval inspection of
manufacturing facilities and selected clinical
investigators; and
--
FDA approval of a new drug
application, or NDA, or NDA supplement.
The testing and approval process requires substantial time,
effort and financial resources, and we cannot be certain that
any new approvals for our products will be granted on a timely
basis, if at all.
Prior to commencing the first clinical trial, we must submit an
IND to the FDA. The IND automatically becomes effective
30 days after receipt by the FDA, unless the FDA, within
the 30-day time period, raises concerns or questions about the
conduct of the clinical trial. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the
clinical trial can begin. Our submission of an IND may not
result in FDA authorization to commence a clinical trial. A
separate submission to the existing IND must be made for each
successive clinical trial conducted during product development,
and the FDA must grant permission for each clinical trial to
start and continue. Further, an independent institutional review
board with jurisdiction over each medical center proposing to
conduct the clinical trial must review and approve the plan for
any clinical trial before it commences at that center.
For purposes of NDA approval, human clinical trials are
typically conducted in three sequential phases that may overlap.
--
Phase I: The drug
is initially given to healthy human subjects or patients and
tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.
--
Phase II: Studies
are conducted in a limited patient population to identify
possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage. Multiple
Phase II clinical trials may be conducted by the sponsor to
obtain information prior to beginning larger and more expensive
Phase III clinical trials. In some cases, a sponsor may
decide to run what is referred to as a
“Phase IIb” evaluation, which is a second,
confirmatory Phase II trial that could, if positive, serve
as a pivotal trial in the approval of a drug.
--
Phase III: When
Phase II evaluations demonstrate that a dosage range of the
product is effective and has an acceptable safety profile,
Phase III trials are undertaken to further evaluate dosage,
to provide statistically significant evidence of clinical
efficacy and to further test for safety in an expanded patient
population at multiple clinical study sites.
Clinical trials are designed and conducted in a variety of ways.
A “placebo-controlled” trial is one in which the trial
tests the results of a group of patients, referred to as an
“arm” of the trial, receiving the drug being tested
against those of an arm that receives a placebo, which is a
substance that the researchers know is not therapeutic in a
medical or chemical sense. In a “double-blind” study,
neither the researcher nor the patient knows into which arm of
the trial the patient has been placed, or whether the patient is
receiving the drug or the placebo. “Randomized” means
that upon enrollment patients are placed into one arm or the
other at random. “Parallel control” trials generally
involve studying a patient population that is not exposed to the
study medication (i.e., is either on placebo or
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standard treatment protocols). In such studies experimental
subjects and control subjects are assigned to groups upon
admission to the study and remain in those groups for the
duration of the study. An “open label” study is one
where the researcher and the patient know that the patient is
receiving the drug. A trial is said to be “pivotal” if
it is designed to meet statistical criteria with respect to
pre-determined “endpoints,” or clinical objectives,
that the sponsor believes, based usually on its interactions
with the relevant regulatory authority, will be sufficient for
regulatory approval. In most cases, two “pivotal”
clinical trials are necessary for approval.
Regulatory authorities or an institutional review board or the
sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk.
The FDA may require, or companies may pursue, additional
clinical trials after a product is approved. These so-called
Phase IV studies may be made a condition to be satisfied
after a drug receives approval. The results of Phase IV
studies can confirm the effectiveness of a product candidate and
can provide important safety information to augment the
FDA’s voluntary adverse drug reaction reporting system.
The results of product development, preclinical studies and
clinical trials are submitted to the FDA as part of an NDA, or
as part of an NDA supplement, for approval of a new indication
if the product candidate is already approved for another
indication. The FDA may deny approval of an NDA or NDA
supplement if the applicable regulatory criteria are not
satisfied, or it may require additional pre-clinical or clinical
data, including an additional pivotal Phase III clinical
trial. Even if such data are submitted, the FDA may ultimately
decide that the NDA or NDA supplement does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product
approval if ongoing regulatory standards are not met or if
safety problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs
to monitor the effect of approved products which have been
commercialized, and the FDA has the power to prevent or limit
further marketing of a product based on the results of these
post-marketing programs.
Satisfaction of FDA requirements or similar requirements of
foreign regulatory agencies typically takes several years and
the actual time required may vary substantially based upon the
type, complexity and novelty of the product or disease.
Typically, if a product candidate is intended to treat a chronic
disease, as is the case with the product candidates we are
developing, safety and efficacy data must be gathered over an
extended period of time, which can range from six months to
three years or more. Two key factors influencing the progression
of clinical trials are the rate at which patients can be
recruited into clinical trials and whether effective treatments
are currently available for the disease the drug is intended to
treat. Patient recruitment is largely dependent upon the
incidence and severity of the disease and the alternative
treatments available, as well as alternate research studies. If
the product candidate is indicated for a disease for which there
are already approved treatments on the market, as is the case
for lisuride, there may be difficulty enrolling sufficient
numbers of patients for clinical trials.
Government regulation may delay or prevent marketing of product
candidates or new drugs for a considerable period of time and
impose costly procedures upon our activities. We cannot be
certain that the FDA or any other regulatory agency will grant
approvals for new indications for our product candidates on a
timely basis, if at all. Success in early stage clinical trials
does not ensure success in later stage clinical trials and even
product candidates that show favorable results in late stage
clinical trials may not get approved for commercialization. Data
obtained from clinical activities is not always conclusive and
may be susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. Even if a product
candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient
populations and dosages. Further, even after regulatory approval
is obtained, later discovery of previously unknown problems with
a product may result in restrictions on the product or even
complete withdrawal of the product from the market.
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Delays in obtaining, or failures to obtain, additional
regulatory approvals for tetrabenazine or any of our other
product candidates would significantly harm our business. In
addition, we cannot predict what adverse governmental
regulations may arise from future United States or foreign
governmental action.
Pursuant to the Food and Drug Administration Modernization Act,
the FDA has developed “Fast Track” policies, which
provide for the potential for expedited review of an NDA.
However, there is no assurance that the FDA will, in fact,
accelerate the review process for a Fast Track product
candidate. Fast Track status is provided only for those new and
novel therapies that are intended to treat persons with
life-threatening and severely debilitating diseases, where there
is a defined unmet medical need, such as where no satisfactory
alternative therapy exists or the new therapy is significantly
superior to alternative therapies. During the development of
product candidates that qualify for this status, the FDA may
expedite consultations and reviews of these experimental
therapies. Further, an accelerated approval process is
potentially available to product candidates that have been
studied for their safety and effectiveness in treating serious
or life-threatening illnesses. The FDA can base approval of a
marketing application for a Fast Track product on an effect on a
clinical endpoint, or on a surrogate endpoint that is reasonably
likely to predict clinical benefit. The FDA may condition the
approval of an application for certain Fast Track products on
additional post-approval studies to validate the surrogate
endpoint or confirm the effect on the clinical endpoint. Fast
Track status may be revoked by the FDA at any time if the
clinical results of a trial fail to continue to support the
assertion that the respective product candidate has the
potential to address an unmet medical need. Although the FDA has
granted Fast Track status to tetrabenazine for the treatment of
chorea associated with Huntington’s disease, there can be
no assurance that the FDA will conduct an expedited review of
the NDA or that the NDA will be approved at all. After a fast
track product is approved for marketing, the FDA can withdraw
its approval under expedited procedures if the sponsor fails to
conduct any required post-approval study of the product, if the
post-approval study fails to demonstrate clinical benefit, if
the FDA concludes that the product is not safe or effective, or
if the sponsor disseminates false or misleading promotional
materials for the product.
Pursuant to the Orphan Drug Act, the FDA may designate a drug
intended to treat a “rare disease or condition” as an
“orphan drug.” A “rare disease or condition”
is generally one that affects fewer than 200,000 people in the
United States. Orphan drug designation must be requested before
submitting an NDA. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory review
and approval process. If a product which has an orphan drug
designation subsequently receives the first FDA approval for the
indication for use for which it has such designation, the
product is entitled to exclusive marketing rights in the United
States for seven years following the approval of the NDA,
meaning that the FDA may not approve any other applications to
market the same drug for the same indication during that period,
except in limited circumstances. However, the FDA could approve
a different drug for the same indication. The FDA can even
approve the same drug for the same indication if the subsequent
product is shown to be clinically superior to the product with
orphan drug exclusivity. Orphan drugs may also be eligible for
federal income tax credits for certain clinical trial expenses.
The FDA has designated tetrabenazine as an orphan drug for the
indications of chorea associated with Huntington’s disease
and for moderate to severe tardive dyskinesia and we intend to
seek orphan drug designations for certain other products in our
product pipeline, including Lisuride Subcutaneous for advanced
Parkinson’s disease. However, the Orphan Drug Act could be
repealed, amended or reinterpreted in ways that may adversely
effect the development of tetrabenazine or any other of our
products which receive orphan drug exclusivity. Further, even if
designated as an orphan drug, our products may not be approved
before other applications and our product candidates may not be
granted orphan drug exclusivity if approved. If a competitor
also has an orphan drug designation for the same drug and
indication, and receives marketing approval before us, our NDA
would not be approved until our competitor’s orphan drug
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exclusivity expires. Therefore there can be no guarantee as to
the precise scope of protection that may be afforded by orphan
drug exclusivity.
Under the Drug Price Competition and Patent Term Restoration Act
of 1984, commonly known as the Hatch-Waxman Act, NDAs for new
chemical entities not previously approved by the FDA may be
entitled to a period of marketing exclusivity. The Hatch-Waxman
Act provides for marketing exclusivity to the first applicant to
gain approval for a particular drug by prohibiting acceptance or
approval of an abbreviated new drug application, or ANDA, from a
generic competitor for up to five years after approval of the
original NDA. This exclusivity only applies to submissions of an
ANDA and would not prevent a third party from conducting pivotal
clinical trials and thereafter filing a complete regulatory
submission for approval. In some cases, new uses or formulations
of approved drugs are eligible for three years of market
exclusivity. If granted by the FDA, any Hatch-Waxman exclusivity
will run concurrently with any other Hatch-Waxman exclusivity
and orphan drug exclusivity that may be granted. Our competitors
will be free during any period of statutory exclusivity to
develop the data necessary either to file an ANDA at the end of
the exclusivity period or to conduct studies in support of a
complete NDA submission during the period of market exclusivity.
The terms of the Hatch-Waxman Act, could be amended to our
disadvantage.
Any products manufactured or distributed by us pursuant to FDA
approvals are subject to continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse
experiences with the drug. Drug manufacturers and their
subcontractors are required to register their establishments
with the FDA and certain state agencies, and are subject to
periodic inspections by the FDA and certain state agencies for
compliance with current Good Manufacturing Practices, or cGMP,
which impose certain procedural and documentation requirements
upon us and our third-party manufacturers in order to ensure
that the product meets applicable specifications. We cannot be
certain that we or our present or future suppliers will be able
to comply with the cGMP and other FDA regulatory requirements.
If our present or future suppliers are not able to comply with
these requirements, the FDA may halt our clinical trials,
require us to recall a drug from distribution, or withdraw
approval of the NDA for that drug.
The FDA closely regulates the marketing and promotion of drugs.
A company can make only those claims relating to safety and
efficacy that are approved by the FDA. Failure to comply with
these requirements can result in adverse publicity, warning
letters, corrective advertising, withdrawal of approval, seizure
of product, injunction and potential civil and criminal
penalties. Physicians may prescribe legally available drugs for
uses that are not described in the product’s labeling and
that differ from those tested by us and approved by the FDA.
Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, restrict manufacturer’s
communications on the subject of off-label use.
The FDA’s policies may change and additional government
regulations may be enacted which could prevent or delay
regulatory approval of our product candidates or approval of new
disease indications for our existing products. We cannot predict
the likelihood, nature or extent of adverse governmental
regulation that might arise from future legislative or
administrative action, either in the United States or abroad.
Canada
The manufacture, distribution and consumption of medical
products, drugs and equipment is regulated by a variety of
industry-specific statutes and regulations in Canada. Drugs sold
in Canada are regulated by the Food and Drugs Act (Canada) and
the regulations made under that Act. The national regulatory
agency in Canada is Health Canada.
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Even though a drug, medical product or device may be approved
for use in another jurisdiction, it may not be sold in Canada
until approved by Health Canada. Outside Canada, the regulatory
approval process for the manufacture and sale of pharmaceuticals
varies from country to country and the time required may be
longer or shorter than that required by Health Canada.
The Food and Drug Regulations require licensing of manufacturing
facilities, carefully controlled research and testing of
products, governmental review and approval of test results prior
to marketing of therapeutic products, and adherence to GMP, as
defined by each licensing jurisdiction, during production.
The principal activities which must be completed prior to
obtaining approval for marketing of a therapeutic drug product
are essentially the same in Canada as in most major markets of
the world and are as follows:
--
Preclinical Animal
Studies. Preclinical
studies are conducted in animals to test pharmacology and
toxicology and to do formulation work based on in vivo results.
--
Phase I Clinical
Trials. Phase I
clinical trials consist of testing a product candidate in a
small number of humans for its safety (toxicity), dose tolerance
and pharmacokinetic properties.
--
Phase II Clinical
Trials. Phase II
clinical trials usually involve a larger patient population than
is required for Phase I trials and are conducted to
evaluate the efficacy of a product candidate in patients having
the disease or medical condition for which the product candidate
is indicated. These trials also serve to further identify side
effects and risks in a larger group of patients.
--
Phase III Clinical
Trials. Phase III
clinical trials involve conducting tests in an expanded patient
population at geographically dispersed test sites (multi-center
trials) in a controlled and/or uncontrolled environment to
gather information about clinical safety and efficacy. These
trials also generate information from which the overall
benefit-risk relationship of the drug can be determined and
provide a basis for drug labeling.
Two key factors influencing the progression of clinical trials
are the rate at which patients can be recruited into clinical
trials and whether effective treatments are currently available
for the disease the drug is intended to treat. Patient
recruitment is largely dependent upon the incidence and severity
of the disease and the alternative treatments available, as well
as alternate research studies.
A Clinical Trial Application (CTA) must be filed and
accepted by the Therapeutic Products Directorate (TPD) of
Health Canada for pharmaceutical drugs or the Biologics and
Genetic Therapies Directorate (BGTD) of Health Canada for
biological and radiopharmaceutical drugs before each phase of
human clinical trials may begin. The CTA application must
contain specified information including the results of the
preclinical or clinical tests completed at the time of the CTA
application. In addition, since the method of manufacture may
affect the efficacy and safety of a drug, information on
chemistry and manufacturing methods must be presented. Health
Canada conducts inspections to determine compliance with GMP.
Good manufacturing practices and quality control procedures must
be in place.
Upon completion of all clinical studies, the results are
submitted to the TPD or BGTD as part of a New Drug Submission
(NDS). A notice of compliance (NOC) which permits marketing
of the product typically takes between 12 and 24 months
from the date a NDS is submitted.
Even after marketing approval has been obtained, further studies
may be required to provide additional data on safety and
efficacy in order to gain approval for the use of a drug as a
treatment for clinical indications other than those for which
the product was initially tested. Also, Health Canada conducts
post-market surveillance programs to monitor a product’s
side effects. Results of post-marketing programs may limit or
expand the further marketing of products. A serious safety or
efficacy problem involving an approved drug or medical device
may result in Health Canada action requiring withdrawal of the
product from the market.
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About one out of every five Canadians is covered by a provincial
drug benefit plan. Each provincial drug benefit plan has its own
“formulary,” a list of prescription and
non-prescription drugs that the province agrees will be paid for
under the plan. After marketing approval has been obtained for a
new drug, provincial committees determine whether the drug
should be added to the province’s formulary and how much
the province is willing to pay for the drug. Refusal to sell the
drug at the price set out by a provincial committee could result
in removal of the drug from the provincial formulary.
PHARMACEUTICAL PRICING AND REIMBURSEMENT
In both the United States and foreign markets, the revenue
associated with our products will depend significantly upon the
availability of reimbursement from third-party payors.
Third-party payors include various government health authorities
such as the Centers for Medicare and Medicaid Services, or CMS,
which administers Medicare and Medicaid, managed-care providers,
private health insurers and other organizations. Third-party
payors are increasingly challenging the price and examining the
cost-effectiveness of medical products and services, including
pharmaceuticals. In addition, significant uncertainty exists as
to the reimbursement status of newly approved pharmaceutical
products. Our products may ultimately not be considered
cost-effective, and adequate third-party reimbursement may not
be available to enable us to maintain price levels sufficient to
support a profitable operation or generate an appropriate return
on our investment in product development.
The United States and foreign governments periodically propose
and pass legislation designed to reduce the cost of healthcare.
Accordingly, legislation and regulations affecting the pricing
of pharmaceuticals may change before our product candidates are
approved for marketing. Adoption of new legislation could
further limit reimbursement for pharmaceuticals. In addition, an
increasing emphasis on managed care in the United States has and
will continue to increase the pressure on pharmaceutical
pricing. The marketability of our products may suffer if the
government and other third-party payors fail to provide adequate
coverage and reimbursement rates for our product candidates.
We intend to obtain coverage and reimbursement for our products
from these third-party payors, however we cannot assure you that
we will be successful in obtaining adequate coverage,
reimbursement, or pricing, if any.
LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
FACILITIES
We currently lease our office space, consisting of an aggregate
of 10,341 square feet, in Washington, D.C. 7,792 of
which is leased under an informal, unwritten month-to-month
arrangement with Prestwick Companies, Inc., a company affiliated
by common control and ownership, and 2,549 of which is leased
from an unaffiliated third party, with a term of two years. We
believe that the terms of our arrangements with Prestwick
Companies, Inc. are no less favorable to us than we could obtain
from an unaffiliated party. In each case alternate space is
readily available on acceptable terms.
EMPLOYEES
As of March 31, 2005, we had 29 full-time employees.
None of our employees are represented by any collective
bargaining unit. We believe that we maintain good relations with
our employees.
SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board consisting of
scientists and other experts in our target markets. Individual
members of this board advise us from time to time on scientific
and medical matters. All members devote a substantial portion of
their time and efforts to responsibilities outside of
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our company. The following table lists our scientific advisory
board members and their title and professional affiliation:
Name
Title/Affiliation
Joseph Coyle, M.D.
Professor of Psychiatry, Harvard Medical School
Jean-Marie Lehn, Ph.D.
Professor, Medicinal Chemistry, University of Strasbourg; Nobel
Laureate, 1987
Stuart Montgomery, M.D.
Professor Emeritus of Psychiatry, London University School of
Medicine
Anne Young, M.D., Ph.D.
Chief, Department of Neurology, Massachusetts General Hospital
Arvid Carlson, M.D., Ph.D.
Professor Emeritus of Pharmacology, University of Goteborg,
Sweden; Nobel Laureate, 2000
Camille Wermuth, Pharm.D., Ph.D.
Professor Emeritus of Medicinal Chemistry, Louis Pasteur
University, France; President, Prestwick Chemical, Inc.
John Growdon, M.D.
Professor of Neurology, Harvard Medical School
DEVELOPMENT ADVISORY BOARD
We have also established a development advisory board consisting
of experts familiar with the development of pharmaceutical
products. This board meets approximately four times per year and
individual members advise us on matters relating to the
development of our products, including clinical trials. All
members devote a substantial portion of their time and efforts
to responsibilities outside of our company. The following table
lists our development advisory board members and their title and
professional affiliation:
Name
Title/Affiliation
Paul Leber, M.D.
Former Director of the Neuropharmacological Drug Products
Division, Office of New Drugs, FDA; Director of NeuroPharm, LLC
Carl Leventhal, M.D.
Former Assistant Surgeon General; Former Deputy Director, Bureau
of Drugs, FDA; Former Director of Division of Neurological
Disorders, National Institutes of Health; Consultant
Richard Crout, M.D.
Former Director, Bureau of Drugs, FDA; Associate Director,
Medical Research, National Institutes of Health
Sandie Morseth, Ph.D.
Former Reviewing Pharmacologist/ Toxicologist, FDA, CDER and
CBER; Toxicology Consultant
William Kramer, Ph.D.
Former Director of Clinical Research, Boehringer Mannheim;
Principal, Kramer Consulting, LLC
Michael Walker, M.D.
Former Director, Division of Stroke, Trauma and
Neurodegenerative Disorders, National Institutes of Health
Roger Porter, M.D.
Former Deputy Director, National Institute of Neurological
Disorders and Stroke, National Institutes of Health; Former Vice
President and Deputy Head, Clinical Research, Wyeth; Adjunct
Professor of Neurology, University of Pennsylvania
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EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth, as of March 31, 2005,
certain information concerning our executive officers, directors
and key employees:
Member of the nominating and corporate governance
committee.
Executive officers
Kathleen E. Clarence-Smith, M.D., Ph.D.
Dr. Clarence-Smith is our founder and has served as our
chief executive officer since April 2005 and as a director since
our inception. From August 2004 to April 2005,
Dr. Clarence-Smith served as our acting chief executive
officer. From our inception to August 2004,
Dr. Clarence-Smith served as our president. From 1999 to
2003, Dr. Clarence-Smith was founder and president of
Prestwick Scientific Capital, Inc. and of Prestwick Chemical,
Inc., a medicinal chemistry company. Dr. Clarence-Smith has
over 15 years of experience in senior positions within the
pharmaceutical industry (Sanofi, Hoffmann-La Roche, Otsuka
America). She directed the development of Abilify, a currently
marketed drug for schizophrenia, while she was in charge of CNS
drug development at Otsuka. At Hoffmann-La Roche, she was in
charge of the worldwide development of neurological drugs, was a
member of both the Licensing Board and of the Development Board,
and successfully launched two development programs in
Parkinson’s disease, one development program in
Alzheimer’s disease, and one development program in
epilepsy. At Sanofi, she headed the CNS group (worldwide
preclinical and clinical) and led pre-existing programs in
depression and Alzheimer’s disease, and launched new
programs in anxiety, epilepsy, muscle relaxation, and pain.
During this period, she authored over 20 patents for new
drugs and obtained registration for a new antidepressant in
several EU countries. Dr. Clarence-Smith also focused on
internationalizing Sanofi’s lead CNS drugs that were
marketed mainly in France. Dr. Clarence-Smith received an
M.D. and a Ph.D. in Neurosciences from the University of Tours
(France) and completed a post-doctoral fellowship at Johns
Hopkins University School of Medicine in the Department of
Pharmacology and Experimental Therapeutics.
Dr. Clarence-Smith is a board-certified neurologist and is
also the founder and the current president of the American
Society of Experimental NeuroTherapeutics (ASENT) and is the
member of several scientific societies. She is the author of
over 100 peer-reviewed scientific papers.
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Management
Melvin D. Booth. Mr. Booth joined our board of
directors in March 2004 and became our executive chairman in
August 2004. From October 1998 to January 2004, Mr. Booth
was president and chief operating officer of MedImmune, Inc.
Mr. Booth also served as a director of MedImmune from
November 1998 through March 2005. Prior to joining MedImmune,
Mr. Booth was president, chief operating officer and a
member of the board of directors of Human Genome Sciences, Inc.
from July 1995 until October 1998. Prior to that time,
Mr. Booth was employed at Syntex Corporation from 1975 to
1995, where he held a variety of positions, including president
of Syntex Laboratories, Inc. from 1993 to 1995 and vice
president of Syntex Corporation from 1992 to 1995. From 1992 to
1993, he served as the president of Syntex Pharmaceuticals
Pacific. From 1991 to 1992, he served as an area vice president
of Syntex, Inc. From 1986 to 1991, he served as the president of
Syntex, Inc., Canada. Mr. Booth is a past chairman of the
Pharmaceutical Manufacturers Association of Canada, and is
currently a board member of Focus Diagnostics, Inc., Millipore
Corporation, Nova Screen Biosciences Corporation, PRA
International and Ventria Bioscience. He is also on the
investment committee of MedImmune Ventures, Inc. Mr. Booth
graduated with honors from Northwest Missouri State University
and holds an honorary doctor of science. He holds a Certified
Public Accountant Certificate.
David A. Cory, R.Ph. Mr. Cory has served as our
president and chief operating officer since August 2004 and
served as our chief commercial officer from September 2003 to
July 2004. From February 2003 to September 2003, Mr. Cory
served as chief commercial officer of CoTherix, Inc. where he
was responsible for in-licensing the company’s lead
product, Ventavis, from Schering AG, securing venture capital
financing of $55 million to acquire the asset, and
preparing for commercialization of Ventavis. From January 2000
to February 2003, Mr. Cory was the senior vice president of
sales and marketing at InterMune, Inc. where he played an
executive role in the company’s initial public offering and
in-licensing of four products, built and led the U.S. commercial
operation of over 130 employees, and grew revenues from
$4 million to in excess of $150 million. From 1988
through 1999, Mr. Cory held management positions of
increasing responsibility and was a commercial director of U.S.
marketing, where he was responsible for launching or managing
over 10 products across oncology, critical care, CNS, and
respiratory therapeutic areas, at Glaxo and Glaxo Wellcome.
Mr. Cory began his career in sales with the Upjohn Company
in 1987. Mr. Cory attended the University of Cincinnati
College of Pharmacy and the Fuqua School of Business at Duke
University, and is board certified in Pharmacy.
Christopher F. O’Brien, M.D.
Dr. O’Brien has served as our chief medical officer
since December 2003. From 2000 to December 2003,
Dr. O’Brien was senior vice president of global
medical affairs at Elan Pharmaceuticals. From 1997 to 2000,
Dr. O’Brien was vice president of the Colorado
Neurological Institute and medical director of the National
Parkinson Foundation Center of Excellence in Colorado, and from
1991 to 2000 was medial director of the Movement Disorders
Center at the Colorado Neurological Institute.
Dr. O’Brien is currently an associate professor in the
Neurology Department at University of California San Diego,
and he has held faculty appointments at the University of
Colorado Health Sciences Center and at the University of
Rochester School of Medicine. He has served as a consultant to a
number of pharmaceutical companies in connection with their
development of various products and compounds.
Dr. O’Brien received his M.D. from the University of
Minnesota School of Medicine and is board certified in
Neurology. He is a fellow of the American Academy of Neurology
and a member of the Movement Disorder Society, the American
Association of Pharmaceutical Physicians and the American
Society for Experimental NeuroTherapeutics.
William H. Washecka. Mr. Washecka has served as our
chief financial officer since November 2004. From August 2002 to
November 2004, Mr. Washecka worked as an independent
consultant. From June 2001 to August 2002, he was executive vice
president and chief financial officer of USinternetworking, Inc.
While serving in this capacity, Mr. Washecka led
USinternetworking through a restructuring under a
Chapter 11 bankruptcy proceeding. Prior to that time, from
1972, Mr. Washecka was employed by Ernst & Young
LLP where he was promoted to partner in 1986. Mr. Washecka
is a graduate of Bernard Baruch College of New York and the
Kellogg Executive Management Program
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Management
and is a certified public accountant. Mr. Washecka is also
a director of Online Resources Corporation, a publicly held
outsourcer of online banking and payment services, Visual
Networks Inc., a publicly held company that designs,
manufactures, sells and supports performance management
platforms for communications networks and Audible, Inc., a
publicly held company that provide audio versions of books,
newspapers and radio programs.
Benjamin P. Lewis, Ph.D., R.Ph., RAC Dr. Lewis has
served as our vice president of regulatory affairs since
September 2003. From 2002 to 2003, Dr. Lewis served as
managing director, regulatory affairs for Brand Institute. Prior
to this position, Dr. Lewis served as a career U.S. Public
Health Service officer assigned to the Food and Drug
Administration until he retired in 2002. From 1993 to 2002,
Dr. Lewis served as director, regulatory operations for the
Division of Emerging and Transfusion Transmitted Diseases,
Center for Biologics Evaluation and Research, FDA. From 1987 to
1992, Dr. Lewis was Pharmacist Director, Immediate Office
of the Center Director, Center for Biologics Evaluation and
Research, FDA. From 1982 to 1987, Dr. Lewis was a
scientific reviewer in the Office of Orphan Products
Development, Office of the Commissioner, Food and Drug
Administration. Dr. Lewis is a licensed pharmacist,
regulatory affairs certified, and is a member of the Regulatory
Affairs Professional Society, Drug Information Association, and
the American Society for Experimental NeuroTherapeutics.
Dr. Lewis holds degrees in pharmacy and pharmaceutical
sciences from Auburn University and postgraduate studies from
Johns Hopkins University.
James P. Shaffer. Mr. Shaffer has served as our
senior director of commercial operations since April 2004 and
has led our sales and marketing efforts to successfully
re-launch Nitoman in Canada and prepare for our United States
launch of tetrabenazine. From January 2001 to April 2004, he was
national sales director for InterMune, Inc., where he built and
managed the United States sales team and created a specialty
distribution network for their lead products, growing sales from
$4 million to $150 million. From 1993 to January 2001,
he held several management positions with increasing
responsibility in marketing and sales across oncology, HIV and
respiratory therapeutic areas at GlaxoSmithKline, Inc. He began
his sales career with Monsanto and Merck in 1988.
Mr. Shaffer received his B.S. and M.B.A. from The Ohio
State University.
Directors
Robert J. Flanagan. Mr. Flanagan has served as a
director and as our corporate secretary since our inception.
From February 2004 to August 2004, Mr. Flanagan served as
our acting chief executive officer. Mr. Flanagan has been
executive vice president of Clark Enterprises, Inc.
(“Clark”), a Bethesda, Maryland based holding company,
since 1989 and is managing director of CNF Investments LLC, the
private equity affiliate of Clark. Prior to joining Clark,
Mr. Flanagan was treasurer, secretary, chief financial
officer and a member of the board of directors of Baltimore
Orioles, Inc. from 1981 to 1989. He was also employed from 1978
to 1981 as a member of Arthur Andersen’s audit division in
its Washington D.C. office. Mr. Flanagan is a director and
head of corporate governance of Martek Biosciences, Inc., a
publicly traded company involved in the development and
commercialization of products derived from microalgae. He is
also a director on the boards of ILD Telecommunications,
Hamilton Pharma, Eagle Oil and Gas, and Castle Brands, Inc. He
is a certified public accountant in Washington, D.C.
Mr. Flanagan received a bachelor’s degree in business
administration from Georgetown University and a master’s
degree in taxation from the American University School of
Business.
James I. Healy, M.D., Ph.D. Dr. Healy
joined our board of directors in February 2003. Since June 2000,
Dr. Healy has served as managing director of Sofinnova
Ventures, a venture capital firm focusing on life sciences
investments. From January 1998 to March 2000, Dr. Healy was
a partner at Sanderling Ventures, a venture capital firm. During
1997, Dr. Healy was a Novartis Foundation Bursary Award
recipient and performed research at Brigham and Women’s
Hospital. From August 1990 to July 1997, Dr. Healy was
employed by the Howard Hughes Medical Institute and Stanford
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Management
University. Dr. Healy serves on the boards of directors of
CoTherix, Inc., InterMune, Inc. and several private companies.
Dr. Healy holds B.A. degrees in molecular biology and
Scandinavian studies from the University of California,
Berkeley, and an M.D. and Ph.D. in immunology from the Stanford
School of Medicine.
Joël Besse. Mr. Besse joined our board of
directors in February 2003. Mr. Besse is senior partner in
the life sciences sector of Atlas Venture, an international
venture capital firm, which he joined in 1995. From 1991 to
1995, Mr. Besse was with SED Ventures, a firm specializing
in international life sciences investments. Mr. Besse is a
director of Arrow Therapeutics Ltd., Newron Pharmaceuticals
S.p.A., Fibrex Medical, Inc. and Xytis Pharmaceuticals Ltd. and
U3 Pharma AG. Mr. Besse holds a Master of Science degree
from the University of Toulouse and graduated from Ecole
Nationale Supérieure de I’Aéronautique et de
l’Espace.
Edgar G. Engleman, M.D. Dr. Engleman joined our
board in February 2003 and served as Chairman until October
2004. He co-founded Vivo Ventures, LLC, a life-sciences focused
venture capital firm in 1997 and is currently a managing member.
He previously co-founded Genelabs Technologies, Inc., Dendreon
Corporation and several other biopharmaceutical companies. From
April 1999 to February 2002, Dr. Engleman was a director of
InterMune Pharmaceuticals, Inc. and Insmed Incorporated, both
publicly traded biopharmaceutical companies. A faculty member at
Stanford University School of Medicine since 1978,
Dr. Engleman has authored more than 200 scientific and
medical articles. He is currently Professor of Pathology and
Medicine and Director of the Stanford Blood Center. He received
his B.A. from Harvard University and his M.D. From Columbia
University. He completed post-graduate training in internal
medicine at the University of California, San Francisco, in
biochemistry at the National Institutes of Health, and in
immunology, rheumatology and transfusion medicine at Stanford.
Patrick G. Enright. Mr. Enright joined our board of
directors in November 2004. Since June 2002, Mr. Enright
has been managing director of Pequot Ventures, where he
specializes in healthcare venture capital investments. From
March 1998 to December 2001, Mr. Enright was a managing
member of Diaz & Altschul Group, LLC, a principal
investment group specializing in investments in
biopharmaceutical and medical device companies. From March 1995
to February 1998, Mr. Enright served in various executive
positions at Valentis, including senior vice president of
corporate development and chief financial officer. From
September 1993 to June 1994, Mr. Enright was senior vice
president of finance and business development for Boehringer
Mannheim Therapeutics, a pharmaceutical company and a subsidiary
of Corange Ltd. From September 1989 to September 1993,
Mr. Enright was employed at PaineWebber Incorporated, an
investment banking firm. From 1984 to 1989, Mr. Enright was
an executive at Sandoz Corporation. Mr. Enright currently
serves on the board of directors of Threshold Pharmaceuticals,
Inc., Valentis, Inc. and several privately-held companies.
Mr. Enright received his M.B.A. from the Wharton School of
Business at the University of Pennsylvania and his B.S. in
Biological Sciences from Stanford University.
Key employees
Richard P. Dulik, Esq. Mr. Dulik has served as our
Director of Legal Affairs since March 2005 and was previously a
legal consultant to us. Mr. Dulik is also an adjunct
Professor of Law at Georgetown Law Center, a member of the
District of Columbia Bar, and a Registered Patent Attorney.
Starting in 2002, Mr. Dulik operated a consulting business
that provided legal services to high technology businesses. From
1996 to 2002, Mr. Dulik was an attorney with Covington
& Burling, a Washington, DC law firm. At Covington, he
assisted advanced technology start-up companies and advised
clients in the areas of intellectual property, licensing,
contracts and technology imports/exports. Mr. Dulik studied
law at Yale University from 1992 to 1995, where he was a John M.
Olin Fellow and a member of the staff of the Yale Law
Journal. Prior to studying law, Mr. Dulik managed a
Federal government research and development unit that
established research programs with private industry in
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Management
technologies ranging from the biological sciences to
microelectronics. Mr. Dulik also served as a Foreign
Service Officer with postings in Jordan and Yemen, and studied
Arabic in Egypt. He received his B.S. and M.S.E. degrees in
Computer Engineering with High Honors from Case Western Reserve
University.
Board composition
The authorized size of our board of directors, which is
currently seven members, is set forth in our Certificate of
Incorporation. Effective upon the completion of this offering,
we will divide our board of directors into three classes, as
follows:
--
Class I, which will consist
of Messrs. Besse and Flanagan, and whose term will expire
at the first annual meeting of stockholders following the
completion of this offering;
--
Class II, which will consist
of Drs. Clarence-Smith, Engleman and Healy, and whose term
will expire at the second annual meeting of stockholders
following the completion of this offering; and
--
Class III, which will consist
of Messrs. Booth and Enright, and whose term will expire at
the third annual meeting of stockholders following the
completion of this offering.
At each annual meeting of stockholders to be held after the
initial classification, the successors to directors whose terms
then expire will serve until the third annual meeting following
their election and until their successors are duly elected and
qualified. The authorized number of directors may be changed
only by resolution of our board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed between the three classes so that,
as nearly as possible, each class will consist of one-third of
the directors. This classification of our board of directors may
have the effect of delaying or preventing changes in our control
or management. Our directors will hold office until their
successors have been elected and qualified or until their
earlier death, resignation, disqualification or removal for
cause by the affirmative vote of the holders of a majority of
the outstanding stock entitled to vote on election of directors.
Committees of the board of directors
Our board of directors has an executive committee, an audit
committee, a compensation committee and a nominating and
corporate governance committee.
Executive committee
Our executive committee has the authority to exercise all powers
of our board of directors except for actions that must be taken
by the full board of directors under the Delaware General
Corporation Law. The executive committee consists of
Messrs. Booth and Flanagan and Drs. Healy and Engleman.
Audit committee
Our audit committee oversees our corporate accounting and
financial reporting process. The functions of this committee
include, among other things:
--
meeting with our management
periodically to consider the adequacy of our internal controls
and the objectivity of our financial reporting;
--
meeting with our independent
auditors and with internal financial personnel regarding these
matters;
--
engaging our independent auditors;
--
reviewing our audited financial
statements and reports and discussing the statements and reports
with our management, including any significant adjustments,
management judgments and estimates, new accounting policies and
disagreements with management; and
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Management
--
reviewing our financial plans and
reporting recommendations to our full board for approval and to
authorize action.
Under the applicable rules of Nasdaq, a company listing in
connection with its initial public offering is permitted to
phase in its compliance with the independent committee
requirements set forth in Rule 4350(c) on the same schedule
as it permitted to phase in its compliance with the independent
audit committee requirement pursuant to
Rule 10A-3(b)(1)(iv)(A) under the Securities and Exchange
Act of 1934, as amended. Accordingly, a company listing in
connection with its initial public offering is permitted to
phase in its compliance with the independent committee
requirements set forth in Rule 4350(c) as follows:
(1) one independent member at the time of listing;
(2) a majority of independent members with 90 days of
listing; and (3) all independent members within one year of
listing.
The audit committee currently consists of Messrs. Enright
(Chairman), Flanagan and Besse. Of these, only Mr. Enright
will be considered to be independent for purposes of service on
the audit committee under applicable SEC rules and Nasdaq
National Market listing standards upon the closing of this
offering. We intend to replace one of our non-independent
directors with an independent director within 90 days of
listing, and we intend to replace our other non-independent
director with an independent director within one year of
listing. All of our audit committee members are financially
literate and have accounting or related financial management
expertise. Mr. Enright is our audit committee financial
expert (as currently defined under SEC rules implementing
Section 407 of the Sarbanes-Oxley Act of 2002). Both our
independent auditors and internal financial personnel meet with
our audit committee.
Compensation committee
Our compensation committee consists of Drs. Healy and
Engleman, both of whom are independent as set forth in the
Nasdaq listing requirements. The functions of this committee
include, among other things:
--
determining the compensation and
other terms of employment of our executive officers and
reviewing and approving corporate performance goals and
objectives relevant to such compensation;
--
recommending to our board of
directors the type and amount of compensation to be paid or
awarded to board members;
--
evaluating and recommending to our
board of directors the equity incentive plans, compensation
plans and similar programs advisable for us, as well as
modification or termination of existing plans and programs;
--
administering the issuance of
stock options and other equity incentive arrangements under our
equity incentive plans;
--
establishing policies with respect
to equity compensation arrangements; and
--
reviewing and approving the terms
of any employment agreements, severance arrangements, change-in-
control protections and any other compensatory arrangements for
our executive officers.
Nominating and corporate governance committee
Our corporate governance and nominating committee consists of
Mr. Booth and Dr. Engleman. Dr. Engleman is
independent as set forth in the Nasdaq listing requirements. We
intend to either add an independent director to this committee
or replace Mr. Booth with an independent director within 90
days of listing to satisfy Nasdaq listing requirements. If we
add another independent director as a
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Management
means of establishing compliance with Nasdaq listing
requirements within 90 days of listing, we will have to
remove or replace Mr. Booth by the first anniversary of
listing to have a committee consisting entirely of independent
directors. The functions of this committee include, among other
things:
--
developing and maintaining a
current list of the functional needs and qualifications of
members of our board of directors;
--
evaluating director performance on
the board and applicable committees of the board and determining
whether continued service on our board is appropriate;
--
interviewing, evaluating,
nominating and recommending individuals for membership on our
board of directors;
--
evaluating nominations by
stockholders of candidates for election to our board;
--
developing, reviewing and amending
a set of corporate governance policies and principles, including
a code of ethics;
--
considering questions of possible
conflicts of interest of directors as such questions
arise; and
--
recommending to our board of
directors the establishment of such special committees as may be
desirable or necessary from time to time in order to address
ethical, legal, business or other matters that may arise.
Director compensation
Our non-employee directors are reimbursed for travel, lodging
and other reasonable out-of-pocket expenses incurred in
attending meetings of our board of directors and for meetings of
any committees of our board of directors on which they serve.
Our directors do not receive cash compensation for attending
board or committee meetings. In February 2004, each of
Drs. Healy and Engleman and Messrs. Flanagan, Besse
and Booth received an option to
purchase 130,000 shares of our common stock at an
exercise price of $0.273 per share, which vests in equal
monthly installments over four years of service. In May 2004,
each of Drs. Healy and Engleman and Messrs. Flanagan,
Besse and Booth received an option to
purchase 30,000 shares of our common stock at an
exercise price of $0.273 per share, which vests in equal
monthly installments over four years of service. In October
2004, each of Drs. Healy and Engleman and
Messrs. Flanagan, Besse and Booth received an option to
purchase 140,000 shares of our common stock at an
exercise price of $0.37 per share, which shares vest in
equal monthly installments over four years, beginning on
November 30, 2004. During 2004, in connection with his
service as our acting chief executive officer, Mr. Flanagan
received eight additional option grants, each such option to
purchase 2,000 shares of our common stock at an
exercise price of $0.273 per share, all of which were fully
vested at the time of grant.
In August 2004, Mr. Booth received an option to
purchase 1,200,000 shares of our common stock at an
exercise price of $0.273 per share, which vests monthly
over a four-year period. A portion of Mr. Booth’s
option is subject to accelerated vesting upon the achievement of
certain milestones, if Mr. Booth is employed by us within
90 days of the date of achievement of the milestones. In
November 2004, upon the closing of our Series B preferred
stock financing, 100,000 shares subject to
Mr. Booth’s option became fully vested. Upon the
closing of this offering, an additional 50,000 shares
subject to Mr. Booth’s option will become fully vested
at that time. If we receive notice from the FDA that our NDA for
tetrabenazine has been approved, an additional
50,000 shares subject to Mr. Booth’s option will
become fully vested at that time.
Effective upon the completion of this offering, we will adopt
our 2005 Non-Employee Directors’ Stock Plan to provide for
the grant of options to purchase shares of common stock to
non-employee directors who are members of the board of directors
after the completion of this offering, annual grants of shares
of our common stock to each of our non-employee directors and
awards of restricted stock units, which in each case shall vest
in accordance with a schedule to be determined by the board
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Management
of directors at the time of each grant. Our employee directors
are eligible to participate in our 2003 Equity Incentive Plan
which will be amended and restated as of the closing of this
offering. For a more detailed description of these plans, see
“Employee benefit plans.”
Compensation committee interlocks and insider
participation
No member of our compensation committee has ever been an officer
or employee of ours. None of our executive officers currently
serve, or has served during the last completed fiscal year, on
the compensation committee or board of directors of any other
entity that has one or more executive officers serving as a
member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to,
earned by or paid to each individual who served as our chief
executive officer in 2004 and our four other most highly
compensated executive officers whose total salary and bonus
exceeded $100,000 for services rendered to us in all capacities
during 2004. We refer to these individuals as our “named
executive officers” in other parts of this prospectus.
Mr. Whitehead resigned as our Chief Executive Officer in
February 2004. Pursuant to a separation agreement,
Mr. Whitehead received severance payments of $320,000 in
2004.
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Management
(2)
Mr. Flanagan resigned as our acting Chief Executive
Officer in August 2004.
(3)
Mr. Van Ausdal resigned as our General Counsel in
December 2004. Pursuant to an offer letter with Mr. Van
Ausdal, as amended, he received aggregate severance payments of
$125,000.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of
stock options to each of the named executive officers during
2004.
The potential realizable value is calculated based on the
term of the option at the time of grant. Stock price
appreciation of 5% and 10% is assumed pursuant to rules
promulgated by the Securities and Exchange Commission and does
not represent our prediction of our stock price performance or
our opinion as to the current value of the options. In addition,
the potential realizable value computation does not take into
account federal or state income tax consequences of option
exercises or sales of appreciated stock. The potential
realizable values at 5% and 10% appreciation are calculated
by:
--
multiplying the number of
shares of common stock under the option by an assumed initial
public offering price of
$ per
share;
--
assuming that the aggregate
stock value derived from that calculation compounds at the
annual 5% or 10% rate shown in the table until the expiration of
the options; and
--
subtracting from that result
the aggregate option exercise price.
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Management
(2)
The stock option vests in equal monthly installments for
48 months from the vesting commencement date.
(3)
The stock option was fully vested on the date of grant.
(4)
This stock option was exercised in full by Mr. Booth in
March 2004 when 2,708 shares underlying this option were
vested. The remaining shares underlying this stock option are
subject to repurchase by us at the lower of the original
purchase price or fair market value in the event that
Mr. Booth’s service with us ceases. Our repurchase
right lapses in accordance with the vesting schedule described
in note (2).
(5)
The vesting of this stock option accelerates, in part, upon
the achievement of certain milestones if Mr. Booth is
employed with us within 90 days of their achievement. The
option vested with respect to 100,000 shares upon the
closing of our Series B preferred stock financing in
November 2004. Upon the completion of this offering,
50,000 shares subject to the option will become fully
vested. If we receive approval from the NDA for tetrabenazine,
an additional 50,000 shares subject to the option will
become fully vested.
(6)
This stock option will terminate in October 2008 if
unexercised.
Stock options granted under our 2003 Equity Incentive Plan
generally have a ten-year term, subject to earlier termination
if the optionee’s service with us ceases. Each stock option
may be exercised prior to vesting, subject to repurchase by us
of the common stock at the lower of the original exercise price
or fair market value. The repurchase right lapses over time in
accordance with the vesting schedules set forth in the table
above. Under certain circumstances and in connection with a
change of control, the vesting of the option grants may
accelerate and become immediately exercisable as described below
in the “Management— Employment and severance
agreements” section. Our board of directors retains the
discretion, under certain circumstances relating to changes in
corporate structure that may affect our common stock, to modify
the terms of outstanding options to reflect such changes and
prevent the diminution or enlargement of benefits or potential
benefits intended to be made available under the 2003 Equity
Incentive Plan, as may be amended and restated.
Percentages shown under “Percent of total options granted
to employees in 2004” are based on an aggregate of
6,386,000 shares of common stock subject to options granted
to our employees during 2004, including our executive officers.
Each stock option was granted with an exercise price equal to
the fair market value of our common stock on the grant date, as
determined by our board of directors. Because there was no
public market for our common stock prior to this offering, the
board of directors determined the fair market value of our
common stock by considering a number of factors, including, but
not limited to, previous valuations, status of product
development, our financial condition and prospects for future
growth.
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Management
AGGREGATED OPTION EXERCISES IN 2004 AND DECEMBER 31,2004 OPTION VALUES
The following table provides information concerning stock
options exercised during 2004, and unexercised stock options
held as of December 31, 2004, by each of our named
executive officers:
Of these shares exercised by Mr. Booth,
102,917 shares were subject to repurchase by us at
December 31, 2004 in the event that Mr. Booth’s
service with us would have ceased as of that date.
Amounts presented under the captions “Value realized”
and “Value of unexercised in-the-money options at
December 31, 2004” are based on an assumed initial
public offering price of
$ per
share minus the exercise price per share, multiplied by the
number of shares subject to the stock option, without taking
into account any taxes that may be payable in connection with
the transaction. Our 2003 Equity Incentive Plan allows for the
early exercise of options. All options exercised early are
subject to repurchase by us at the lower of the original
exercise price or fair market value. The repurchase right lapses
over time in accordance with the vesting schedules described in
the footnotes under “Stock Option Grants in Last Fiscal
Year” above.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Kathleen Clarence-Smith. In February 2003, we entered
into an executive employment agreement with
Dr. Clarence-Smith. The agreement provides that
Dr. Clarence-Smith is an at-will employee, which means she
or we can terminate her employment at any time, with or without
cause. The agreement also provides that Dr. Clarence-Smith
is entitled to the following compensation after the termination
of her employment if we terminate her employment other than for
cause (as defined in the agreement) or if
Dr. Clarence-Smith terminates her employment with us for
good reason (as defined in the agreement):
--
an amount equal to six months of
her base salary then in effect, payable on our standard payroll
dates, or in a lump sum at our discretion;
--
a lump sum payment equal to 50% of
her base salary then in effect, payable 12 months following
termination; and
--
if she elects to continue coverage
under our group health insurance plan, reimbursement of her
insurance premiums for a period of 12 months or until she
qualifies for health insurance benefits from a new employer,
whichever occurs first.
Further, upon termination of Dr. Clarence-Smith by us other
than for cause or by her for good reason, or upon the date on
which we experience a change of control (as defined in the
agreement), the
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Management
unvested portion of a stock option held by
Dr. Clarence-Smith to acquire up to 1,250,000 shares
of our common stock would vest and become immediately
exercisable. In August 2004, we entered into a letter agreement
with Dr. Clarence-Smith pursuant to which she was appointed
as our acting chief executive officer and a number of
performance goals were established. In April 2005,
Dr. Clarence-Smith was appointed as our chief executive
officer.
Melvin D. Booth. In August 2004, we entered into an
employment offer letter agreement with Mr. Booth to serve
as our executive chairman. The term of the offer letter is for
one year, or until August 2005, but can be renewed for
additional one-year terms. In the event that we terminate
Mr. Booth without cause (as defined in the offer letter)
during the initial one-year term, he is entitled to a severance
amount equal to his base salary for the remainder of the initial
term, and his option to purchase 1,200,000 shares of
our common stock would vest through the end of such initial
term. In the event that Mr. Booth’s employment with us
is terminated for any reason after the initial term is complete,
he is not entitled to receive any severance or acceleration of
vesting.
Other Current Executive Officers. We have entered into
employment offer letter agreements with each of David Cory,
James Shaffer, William Washecka, Christopher O’Brien and
Benjamin Lewis. The offer letters with Messrs. Cory,
Shaffer, Washecka and O’Brien provide that in the event of
an asset transfer or acquisition (each as defined in our
certificate of incorporation in effect prior to the closing of
this offering), and one of the following events occurs within
12 months following such transaction, the initial stock
option granted to each such officer will fully vest:
--
the officer is terminated without
cause (as defined in the offer letter);
--
the principal place of the
officer’s performance of his duties is changed to a
location outside of a 40-mile radius of such officer’s then
current place of residence; or
--
there is a substantial reduction
in the officer’s responsibilities, duties or base pay that
is not cured within 30 days after notice from the officer.
Further, the offer letters with Messrs. Cory, Shaffer and
O’Brien contemplate that if the officer is terminated
without cause, he will receive severance in an amount equal to
six months of his current base salary, payable at our discretion
on our standard payroll dates or in a lump-sum payment.
Former Executive Officers. In February 2004 we entered
into a separation agreement with Robert Whitehead, who had been
serving as our chief executive officer and a director.
Mr. Whitehead received as severance an amount equal to his
base salary for 12 months. All such amounts were paid to
Mr. Whitehead on or before December 31, 2004. In
addition Mr. Whitehead received accelerated vesting of his
stock option and was entitled to exercise the option for 298,009
shares, which he subsequently exercised in May 2004. In
November 2004 we agreed with Mark Van Ausdal, our then-serving
general counsel, that his employment would terminate on
December 31, 2004. Mr. Van Ausdal received a severance
amount equal to six months of his base salary, which was paid as
a lump sum.
EMPLOYEE BENEFIT PLANS
2003 Equity Incentive Plan
Our board of directors adopted, and our stockholders approved,
in January 2003 the 2003 Equity Incentive Plan. Our board of
directors has approved the amendment and restatement of the 2003
Equity Incentive Plan, or Restated 2003 Plan, to become
effective upon the effective date of this offering. We
anticipate that our stockholders will approve the restated 2003
Plan prior to the closing of this offering. The Restated 2003
Plan will terminate in January 2013 unless our board of
directors terminates it earlier. The Restated 2003 Plan provides
for the grant of the following, which are referred to
collectively as “stock awards”:
--
incentive stock options, as
defined under the Code, which may be granted solely to our
employees or employees of certain affiliated entities, including
officers;
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Management
--
nonstatutory stock options, stock
bonuses and rights to purchase stock, which may be granted to
our directors, consultants or employees (or those of certain
affiliated entities), including officers; and
--
stock appreciation rights (SARs)
and restricted stock units (RSUs), which may be granted to our
directors, consultants or employees (or those of certain
affiliated entities), including officers.
Share reserve
An aggregate of 12,500,000 shares of our common stock are
reserved for issuance under the Restated 2003 Plan and our board
of directors intends to increase the size of the share reserve
effective upon the completion of this offering, although it has
not yet determined the amount of this increase. Options to
purchase an aggregate of 9,065,500 shares of our common
stock were outstanding under the Restated 2003 Plan as of
March 31, 2005. In addition, 678,008 shares were
outstanding pursuant to the exercise of options under the
Restated 2003 Plan as of March 31, 2005, of which
122,917 shares were subject to our right of repurchase. If
any stock award under the Restated 2003 Plan is not exercised in
full, or if the shares issued to a participant as part of a
stock bonus or purchase of stock are otherwise forfeited or
repurchased by us (including, for example, in the case of a
failure to meet a vesting condition), or if any award is settled
in cash, then any shares that have not been issued, or which are
forfeited or repurchased, shall revert to the Restated 2003 Plan
and are available for future issuance under the Restated 2003
Plan. If shares subject to a stock award are not delivered to a
participant because they are used to satisfy the award’s
exercise price (a “net exercise”) or any tax
withholding obligations related to the exercise of an award or
the sale of shares, then such shares shall revert to the
Restated 2003 Plan and are available for future issuance under
the Restated 2003 Plan. In any event, the maximum number of
shares that may be issued through the exercise of incentive
stock options is 12,500,000 shares. Shares issued under the
Restated 2003 Plan may be previously unissued shares or
reacquired shares bought in the market or otherwise.
Administration
The Restated 2003 Plan will continue to be administered by our
board of directors or our compensation committee, which has been
delegated authority by the board of directors to administer the
Restated 2003 Plan. Subject to the terms of the Restated 2003
Plan, our board of directors or its authorized committee
determines recipients, the numbers and types of stock awards to
be granted and the terms and conditions of the stock awards,
including the period of their exercisability and vesting. The
board of directors or compensation committee may permit the
exercise of a stock option with respect to shares that are not
vested (an “early exercise”) in exchange for the
participant’s receipt of stock which is subject to our
repurchase right, which lapses according to the same vesting
schedule as the original option. Subject to the limitations set
forth below, our board of directors or its authorized committee
will also determine the exercise price of options granted under
the Restated 2003 Plan.
Stock options
Stock options are granted pursuant to stock option agreements.
Generally, the exercise price for an incentive stock option or
nonstatutory stock option cannot be less than 100% of the fair
market value of the common stock on the date of grant. Options
granted under the Restated 2003 Plan vest at the rate specified
in the individual stock option agreement between the optionee
and us.
In general, the term of stock options granted under the Restated
2003 Plan may not exceed ten years. Unless the terms of an
optionee’s stock option agreement provide for later
termination, if an optionee’s service relationship with us,
or any affiliate of ours, ceases due to disability or death, the
optionee, or his or her beneficiary, may exercise any vested
options up to twelve months, or eighteen months in the event of
death, after the date such service relationship ends. If an
optionee’s relationship with us, or any affiliate of ours,
ceases for any reason other than disability or death, the
optionee may exercise any vested options up to three months from
cessation of service, unless the terms of the stock option
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Management
agreement provide for earlier or later termination. In no event
may an option be exercised after its expiration date.
Acceptable consideration for the purchase of common stock issued
under the Restated 2003 Plan will be determined by our board of
directors and may include cash, common stock previously owned by
the optionee, a deferred payment arrangement and other legal
consideration approved by our board of directors.
Generally, an optionee may not transfer a stock option other
than by will or the laws of descent and distribution unless the
optionee holds a nonstatutory stock option that provides
otherwise. However, an optionee may designate a beneficiary who
may exercise the option following the optionee’s death.
Limitations
Incentive stock options may be granted only to our employees or
the employees of certain of our affiliated entities. The
aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to incentive stock
options that are exercisable for the first time by an optionee
during any calendar year under all of our stock plans may not
exceed $100,000. The options or portions of options that exceed
this limit are treated as nonstatutory stock options. No
incentive stock option may be granted to any person who, at the
time of the grant, owns or is deemed to own stock possessing
more than 10% of our total combined voting power, or any parent
or subsidiary of ours, unless the following conditions are
satisfied:
--
the option exercise price must be
at least 110% of the fair market value of the stock subject to
the option on the date of grant; and
--
the term of any incentive stock
option award must not exceed five years from the date of grant.
If a participant is actively in violation of our proprietary
information, non-solicitation and non-competition agreement with
the participant, or is otherwise inappropriately competing with
us, then the Restated 2003 Plan provides that any unexercised
stock options shall, at our election, be immediately terminated
and forfeited, and we may rescind any exercise of stock options
occurring in the six-month period before the violation, and we
may require the participant to return any profits from the sale
of our common stock underlying the options.
Stock bonus awards
A stock bonus award may be awarded in consideration for the
recipient’s past services performed for us, or other valid
consideration. If a stock bonus recipient’s service
relationship with us or an affiliate terminates, we may
reacquire all of the shares of our common stock issued to the
recipient pursuant to a stock bonus award which has not vested
as of the date of termination. Any reacquisition of unvested
shares shall be at no cost to us. Rights to acquire shares under
a stock bonus award may only be transferred to the extent
provided in the stock bonus award agreement.
Stock purchase awards
A stock purchase award occurs through a restricted stock
purchase agreement. Subject to certain limitations, the purchase
price for stock purchase awards must be at least 100% of the
fair market value of the common stock on the date of grant or at
the time the purchase is consummated. If a stock purchase award
recipient’s service relationship with us or an affiliate
terminates, we may repurchase all of the shares of our common
stock issued to the recipient pursuant to a stock purchase award
that have not vested as of the date of termination. Any
repurchase of unvested shares shall be at the lesser of the fair
market value of the common stock or the price paid by the
recipient. The purchase price for a restricted stock award may
be payable in cash, a deferred payment arrangement, or any other
form of legal consideration approved by our board of directors
or compensation committee. Rights to acquire shares under a
stock purchase award may only be transferred to the extent
provided in the stock purchase award.
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Management
Stock appreciation rights
Stock appreciation rights are granted through a stock
appreciation right agreement. Each stock appreciation right is
denominated in share equivalents. The strike price of each stock
appreciation right is determined by our board of directors or
the compensation committee at the time of grant of the stock
appreciation right. Our board of directors or the compensation
committee may also impose any restrictions or conditions upon
the vesting of stock appreciation rights that it deems
appropriate. Stock appreciation rights may be settled in our
common stock or in cash or any combination of the two, or any
other form of legal consideration approved by our board of
directors. If a stock appreciation right recipient’s
relationship with us, or any affiliate of ours, ceases for any
reason, the recipient may exercise any vested stock appreciation
right up to three months from cessation of service, unless the
terms of the stock appreciation right agreement provide for
earlier or later termination.
Restricted stock units
Restricted stock units entitle the recipient to receive a number
of shares of our common stock, determined by our board of
directors or compensation committee, on a date in the future, or
the cash equivalent of these shares as determined by our board
of directors or compensation committee, either upon vesting of
the restricted stock unit or later. Our board of directors or
compensation committee may impose any restrictions or conditions
upon the vesting of restricted stock units, or that delay the
delivery of the consideration after the vesting of restricted
stock units, that it deems appropriate. Restricted stock units
may be settled in our common stock or in cash or any combination
of the two, or any other form of legal consideration approved by
our board of directors or compensation committee. Dividend
equivalents may be credited in respect of shares covered by a
restricted stock unit, as determined by our board of directors
or compensation committee. At the discretion of our board of
directors or compensation committee, such dividend equivalents
may be converted into additional shares covered by the
restricted stock units. If a restricted stock unit
recipient’s service relationship with us terminates, any
unvested portion of the restricted stock unit is forfeited upon
the recipient’s termination of service.
Corporate transactions/ change in control
In the event of certain corporate transactions, all outstanding
stock awards under the Restated 2003 Plan may be assumed or
continued, or may be substituted for, by any surviving entity.
If the surviving entity elects not to assume or continue, or
substitute for such awards, the vesting provisions of such stock
awards will be accelerated in full and such stock awards will be
terminated if not exercised prior to the effective date of the
corporate transaction. A stock award may be subject to
acceleration of vesting in the event of a change in control as
may be provided in the applicable stock option award agreement
or other written agreement between the award recipient and us.
Plan amendments
Our board of directors will have the authority to amend or
terminate the Restated 2003 Plan at any time. No amendment or
termination of the Restated 2003 Plan shall adversely affect any
rights under awards already granted to a participant unless
agreed to by the affected participant. To the extent stockholder
approval is necessary to satisfy applicable law, no amendment to
the Restated 2003 Plan shall be effective unless approved by our
stockholders.
2005 Non-Employee Directors’ Stock Plan
Our board of directors approved the 2005 Non-Employee
Directors’ Stock Plan (the “2005 Directors
Plan”) in April 2005. We anticipate that our stockholders
will approve the 2005 Directors Plan prior to the closing of
this offering. Our 2005 Directors Plan will become
effective upon the effective date of this offering. The
2005 Directors Plan will terminate at the discretion of our
board of directors. The
118
Management
2005 Directors Plan permits our board of directors to grant
nonstatutory stock options, restricted stock and restricted
stock units of common stock to our non-employee directors.
Share reserve
Our board of directors has not yet determined the number of
shares of our common stock to be reserved for issuance under the
2005 Directors Plan, but it will do so prior to the
completion of this offering. If any stock award under the
2005 Directors Plan is not exercised in full, or if the
shares issued to a participant as part of a stock bonus or stock
purchase award are otherwise forfeited or repurchased by us
(including, for example, in the case of a failure to meet a
vesting condition), or if an award is settled in cash, then any
shares that have not been issued, or which are forfeited or
repurchased, shall revert to the 2005 Directors Plan and
are available for future issuance under the plan. If shares
subject to a stock award are not delivered to a director because
they are used to satisfy the award’s exercise price (a
“net exercise”) or any tax withholding obligations
related to the exercise of an award on the sale of shares, then
such shares shall revert to the 2005 Directors Plan and are
available for future issuance under the plan. Shares issued
under the 2005 Directors Plan may be previously unissued
shares or reacquired shares bought in the market or otherwise.
Administration
The 2005 Directors Plan will be administered by our board
of directors, who may in turn delegate authority to administer
the 2005 Directors Plan to the compensation committee.
Stock options
Stock options will be granted pursuant to stock option
agreements. The exercise price of the options granted under the
2005 Directors Plan will be equal to 100% of the fair
market value of the common stock on the date of grant. Our board
of directors or compensation committee has discretion to
determine the vesting schedule of the stock options.
In general, the term of stock options granted under the
2005 Directors Plan may not exceed ten years. Unless the
terms of a director’s stock option agreement provide for
earlier or later termination, if a director’s service
relationship with us, or any affiliate of ours, ceases due to
disability or death, the optionee, or his or her beneficiary,
may exercise any options to the extent vested up to
12 months, or 18 months in the event of death, after
the date such service relationship ends. If a director’s
service relationship with us, or any affiliate of ours, ceases
for any reason other than disability or death, the director may
exercise any options to the extent vested up
to months
from cessation of service, unless the terms of the stock option
agreement provide for earlier or later termination. In no event
may an option be exercised after its expiration date.
Acceptable consideration for the purchase of common stock issued
under the 2005 Directors Plan may include cash or check,
common stock previously owned by the director, or through a
program developed under Regulation T as promulgated by the
Federal Reserve Board.
Generally, a director may not transfer a stock option other than
by will or the laws of descent and distribution, unless the
stock option agreement provides for such transfer. A director
may designate a beneficiary who may exercise the option
following the director’s death.
Stock bonus and purchase awards
A stock bonus or a stock purchase award occurs through a stock
bonus or purchase agreement. Subject to certain limitations, the
purchase price for a stock purchase must be at least 100% of the
fair market value of the common stock on the date of grant or at
the time the purchase is consummated. If a director’s
service relation with us or an affiliate terminates, we may
repurchase all of the shares of our common stock issued to the
director pursuant to a stock bonus or purchase award that have
not
119
Management
vested as of the date of termination. If a director has
purchased the stock, then any repurchase of unvested shares by
us shall be at the lesser of the fair market value of the common
stock or the price paid by the director. If a director has been
awarded a stock bonus, then we can reacquire any stock under a
stock bonus agreement at no cost. The purchase price for a stock
purchase award may be payable in cash, a deferred payment
arrangement, or any other form of legal consideration approved
by our board of directors or compensation committee. Rights to
acquire shares under a stock purchase award may only be
transferred to the extent provided in the stock purchase award.
Restricted stock units
Restricted stock units entitle the director to receive a number
of shares of our common stock, determined by our board of
directors or compensation committee, on a date in the future, or
the cash equivalent of these shares as determined by our board
of directors or compensation committee, either upon vesting of
the restricted stock unit or later. Our board of directors or
compensation committee may impose any restrictions or conditions
upon the vesting of restricted stock units, or that delay the
delivery of the consideration after the vesting of restricted
stock units, that it deems appropriate. Restricted stock units
may be settled in our common stock or in cash or any combination
of the two, or any other form of legal consideration approved by
our board of directors or compensation committee. Dividend
equivalents may be credited in respect of shares covered by a
restricted stock unit, as determined by our board of directors
or compensation committee. At the discretion of our board of
directors or compensation committee, such dividend equivalents
may be converted into additional shares covered by the
restricted stock units. If a director’s service
relationship with us terminates, any unvested portion of the
restricted stock unit is forfeited upon the director’s
termination of service.
Corporate transactions/ change of control
In the event of certain corporate transactions, all outstanding
stock options and awards under the 2005 Directors Plan may
be assumed or continued, or may be substituted for, by any
surviving entity. If the surviving entity elects not to assume
or substitute for such options, the vesting provisions of such
awards will be accelerated, and such options will be terminated
if not exercised prior to the effective date of the corporate
transaction. In the event of a change in control, the vesting
provisions of all outstanding options or awards under the
2005 Directors Plan will be accelerated if so provided in
the applicable stock option agreement or other agreement between
the director and us.
Plan amendments
Our board of directors will have authority to amend or terminate
the 2005 Directors Plan. No amendment or termination of the
2005 Directors Plan shall adversely affect any rights under
awards already granted to a director unless agreed to by the
affected director. To the extent necessary to satisfy applicable
law, no amendment to the 2005 Directors Plan shall be
effective unless approved by our stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation, which
will become effective upon the completion of this offering,
limits the liability of directors to the fullest extent
permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors,
except liability for any of the following acts:
--
any breach of their duty of
loyalty to the corporation or its stockholders;
--
acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law;
120
Management
--
unlawful payments of dividends or
unlawful stock repurchases or redemptions; or
--
any transaction from which the
director derived an improper personal benefit.
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our amended and restated bylaws, which will become effective
upon the completion of this offering, also provide that we will
indemnify our directors, officers, employees and other agents to
the fullest extent permitted by law. Our amended and restated
bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with his or her
services to us, regardless of whether our amended and restated
bylaws permit such indemnification. We have obtained an
insurance policy that insures our directors and officers against
certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended, or otherwise.
We have entered, and intend to continue to enter, into separate
indemnification agreements with our directors and executive
officers, in addition to the indemnification provided for in our
amended and restated bylaws. These agreements, among other
things, provide that we will indemnify our directors and
executive officers for certain expenses, including
attorneys’ fees, judgments, fines and settlement amounts
incurred by a director or executive officer in any action or
proceeding arising out of their services as one of our directors
or executive officers, or any of our subsidiaries or any other
company or enterprise to which the person provides services at
our request.
At present, there is no pending litigation or proceeding
involving any of our directors or executive officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
121
Principal stockholders
The following table shows information known to us with respect
to the beneficial ownership of our common stock as of
March 31, 2005 by:
--
each of our directors;
--
each named executive officer;
--
each person or group of affiliated
persons known by us to beneficially own more than 5% of our
common stock; and
--
all of our directors and executive
officers as a group.
Beneficial ownership and percentage ownership are determined in
accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock underlying
options and warrants that are exercisable within 60 days of
March 31, 2005 are considered to be outstanding. To our
knowledge, except as indicated in the footnotes to the following
table and subject to community property laws where applicable,
the persons named in this table have sole voting and investment
power with respect to all shares of our common stock shown as
beneficially owned by them.
The following table reflects the conversion of all
50,579,299 shares of our preferred stock outstanding as of
March 31, 2005 into an aggregate of 50,579,299 shares
of our common stock, which will become effective at the closing
of this offering. This table is based on 63,342,132 shares
of our common stock outstanding as of March 31, 2005
and shares
outstanding immediately after this offering. The address for
those individuals for which an address is not otherwise
indicated is: c/o Prestwick Pharmaceuticals, Inc.,
1825 K Street NW, Suite 1475, Washington, DC20006.
Entities affiliated with Pequot Capital Management,
Inc.(9)
8,170,541
—
12.9
c/o Pequot Capital Management, Inc.
500 Nyala Farm Road Westport, CT06880
Kathleen Clarence-Smith, M.D., Ph.D.
2,687,514
3,000,000
8.6
*
Represents beneficial ownership of less than 1%.
(1)
Shares of preferred stock are shown on an as-converted
basis.
(2)
Mr. Whitehead resigned as our Chief Executive Officer on
February 25, 2004. Pursuant to a separation agreement,
Mr. Whitehead became vested in 298,009 shares of
common stock pursuant to options previously granted to him.
Mr. Whitehead exercised these options and acquired these
298,009 shares of common stock on May 21, 2004.
(3)
Consists of 1,208,754 shares of common stock held of
record, 1,018,883 shares of common stock issuable upon
conversion of preferred stock held of record and
26,637 shares of common stock issuable upon exercise of an
immediately exercisable warrant held by CNF Investments
123
Principal stockholders
LLC. Mr. Flanagan is a manager of CNF Investments LLC,
shares voting and dispositive power with respect to the shares
held by CNF Investments LLC and disclaims beneficial ownership
except to the extent of his pecuniary interest therein. Also
includes 316,000 shares issuable upon exercise of options
held by Mr. Flanagan that are exercisable within
60 days of March 31, 2005.
(4)
Consists of 130,000 shares of common stock held of
record by Mr. Booth, of which 94,792 shares are
subject to our right of repurchase as of March 31, 2005,
and 1,370,000 shares issuable upon exercise of options
exercisable within 60 days of March 31, 2005.
(5)
Mr. van Ausdal resigned as our General Counsel on
December 31, 2004. Mr. van Ausdal exercised the vested
portion of options previously granted to him and acquired
123,958 shares of common stock on March 29, 2005.
(6)
Consists of: 1,604,186 shares of common stock held of
record and 10,070,858 shares of common stock issuable upon
conversion of preferred stock held of record by Sofinnova
Venture Partners V, LP; 52,778 shares of common stock
held of record and 331,334 shares of common stock issuable
upon conversion of preferred stock held of record by Sofinnova
Venture Affiliates V, LP; and 24,598 shares of common
stock held of record and 154,420 shares of common stock
issuable upon conversion of preferred stock held of record by
Sofinnova Venture Principals V, LP. Dr. Healy is a
general partner of each of these partnerships, shares voting and
dispositive power with respect to the shares held by each of
these entities and disclaims beneficial ownership of the shares
in which he has no pecuniary interest. Also includes
300,000 shares issuable upon exercise of options held by
Dr. Healy that are exercisable within 60 days of
March 31, 2005.
(7)
Atlas Venture Fund V, L.P. (“Atlas V”) is
the record holder of 464,429 shares of common stock and
2,920,607 shares of common stock issuable upon conversion of
preferred stock (the “Atlas V Shares”). Atlas
Venture Parallel Fund V-A, C.V. (“Atlas V-A”) is
the record holder of 57,689 shares of common stock and 362,784
shares of common stock issuable upon conversion of preferred
stock (the “Atlas V-A Shares”). Atlas Venture Parallel
Fund V-B, C.V. (“Atlas V-B”) is the record holder
of 57,689 shares of common stock and 362,784 shares of common
stock issuable upon conversion of preferred stock (the
“Atlas V-B Shares”). Atlas Venture
Entrepreneurs’ Fund V, L.P. (“AVE V”)
is the record holder of 7,731 shares of common stock and 48,615
shares of common stock issuable upon conversion of preferred
stock (the “AVE V Shares”). Atlas Venture
Fund VI, L.P. (“Atlas VI”) is the record
holder of 840,830 shares of common stock and 5,283,864 shares of
common stock issuable upon conversion of preferred stock (the
“Atlas VI Shares”). Atlas Venture Fund VI
GmbH KG & CO. KG (“AV VI GmbH”) is the
record holder of 15,396 shares of common stock and 96,751 shares
of common stock issuable upon conversion of preferred stock (the
“AV VI GmbH Shares”). Atlas Venture
Entrepreneurs’ Fund VI, L.P. (“AVE VI”
and together with Atlas V, Atlas V-A, Atlas V-B,
AVE V, Atlas VI and Atlas GmbH, the “Funds”)
is the record holder of 25,083 shares of common stock and
161,576 shares of common stock issuable upon conversion of
preferred stock (the “AVE VI Shares” and together
with the Atlas V Shares, the Atlas V-A Shares, the
Atlas V-B Shares, the AVE V Shares, the Atlas VI
Shares and the Atlas GmbH Shares, the “Shares”). As
general partner or managing limited partner, as the case may be,
of certain of the Funds, and by virtue of the Funds relationship
as affiliated limited partnerships, each of Atlas Venture
Associates V, L.P. (“AVA V LP”) and Atlas
Venture Associates VI, L.P. (“AVA VI LP”)
may also be deemed to beneficially own the Shares. As the
general partner of AVA V LP and AVA VI LP,
respectively, Atlas Venture Associates V, Inc.
(“AVA V Inc.”) and Atlas Venture
Associates VI, Inc. (“AVA VI Inc.”) may also
be deemed to beneficially own the Shares. In their capacities as
directors of AVA V Inc. and AVA VI Inc. each of
Messrs. Axel Bichara, Jean-Francois Formela and Christopher
Spray may be deemed to beneficially own the Shares. Each of
124
Principal stockholders
Messrs. Bichara, Formela and Spray disclaim beneficial
ownership of the Shares except to the extent of his pecuniary
interest therein. Mr. Besse is a Senior Partner with Atlas
Venture and may be deemed to beneficially own the Shares and
disclaims beneficial ownership of the Shares except to the
extent of his pecuniary interest therein. Mr. Besse’s
shares include 300,000 shares issuable upon the exercise of
options held by Mr. Besse that are exercisable within
60 days of March 31, 2005. The proceeds of any sale of
shares of common stock issued to Mr. Besse upon exercise of
these options will be transferred to the Funds and he therefore
disclaims beneficial ownership of such shares which belong to
the Funds.
(8)
Consists of: 822,242 shares of common stock held of
record and 1,676,259 shares of common stock issuable upon
conversion of preferred stock held of record by BioTechnology
Development Fund II, L.P.; 811,241 shares of common
stock held of record and 7,975,429 shares of common stock
issuable upon conversion of preferred stock held of record by
BioTechnology Development Fund IV, L.P.; 14,994 shares
of common stock held of record and 147,405 shares of common
stock issuable upon conversion of preferred stock held of record
by BioTechnology Development Fund IV Affiliates, L.P.; and
33,085 shares of common stock held of record and
757,521 shares of common stock issuable upon conversion of
preferred stock held of record by BioAsia Crossover Fund, L.P.
Dr. Engleman is a managing member of the general partner of
each of these partnerships, shares voting and dispositive power
with respect to the shares held by each of these entities and
disclaims beneficial ownership of the shares in which he has no
pecuniary interest. Also includes 300,000 shares issuable
upon exercise of options held by Dr. Engleman that are
exercisable within 60 days of March 31, 2005.
(9)
Consists of: 7,161,063 shares of common stock issuable
upon conversion of preferred stock held of record by Pequot
Private Equity Fund III, L.P.; and 1,009,478 shares of
common stock issuable upon conversion of preferred stock held of
record by Pequot Offshore Private Equity Partners III, L.P.
Pequot Capital Management, Inc. is the Investment Manager for
Pequot Private Equity Fund III, L.P. and Pequot Offshore
Private Equity Partners III, L.P., and holds all voting and
dispositive power for all shares held of record by these funds.
Mr. Enright is a Managing Director of Pequot Capital
Management, Inc. and a general partner of each of these funds.
Mr. Enright serves as a member of our board of directors
and may be deemed to beneficially own the securities held of
record by these funds. Mr. Enright disclaims beneficial
ownership of the shares held by these funds, except to the
extent of his pecuniary interest.
(10)
Consists of 9,234,327 shares of common stock issuable
upon conversion of preferred stock held of record by BAVP, L.P.
and 1,348,069 shares of common stock issuable upon exercise
of warrants held by BAVP, L.P.
125
Certain relationships and related party transactions
ISSUANCES OF COMMON STOCK
In connection with the initial formation and capitalization of
our company, we issued 6,000,000 shares of our common stock
to our affiliate Prestwick Scientific Capital, Inc. in exchange
for Prestwick Scientific Capital’s contribution of assets
to us. The assets contributed to us included certain rights we
hold to tetrabenazine, lisuride, D-Serine and PPI-03306, as well
as rights under license agreements and patent applications.
These initial 6,000,000 shares were distributed by
Prestwick Scientific Capital to its sole stockholder, Prestwick
Companies, Inc. (PCI) as a dividend. PCI, in turn,
distributed these shares to its stockholders in accordance with
their respective ownership interests. This distribution to the
stockholders of PCI included 1,437,514 shares of our common
stock that were distributed to Dr. Clarence-Smith, our
chief executive officer, and 1,208,754 shares of our common
stock that were distributed to CNF Investments, LLC, an entity
of which one of our directors, Robert Flanagan, is a managing
member.
In December 2002 we issued to Dr. Clarence-Smith an
additional 1,250,000 shares at a price of $0.037 per
share, for a total purchase price of $46,250. Of the purchase
price, $1,250 was paid in cash and the remaining $45,000 was
paid by issuance of a 4.25% interest-bearing recourse promissory
note from Dr. Clarence-Smith to us. This promissory note
was repaid in full, plus interest thereon, as of March 31,2005.
From January 2003 to March 31, 2005, we granted an
aggregate of 10,344,493 options to our current executive
officers, including the named executive officers, with exercise
prices ranging from $0.037 to $0.37 per share. We have also
made certain option grants to our current non-employee directors
as described in “Management— Director
compensation.”
ISSUANCES OF PREFERRED STOCK AND COMMON STOCK WARRANTS
In December 2002, we issued and sold $2 million aggregate
principal amount of convertible promissory notes and warrants to
purchase an aggregate of 400,000 shares of common stock at
an exercise price of $1.00 per share. The convertible
promissory notes, plus interest thereon, converted into shares
of our Series A-1 preferred stock in February 2003.
In February 2003, we issued and sold to investors an aggregate
of 10,065,999 shares of Series A-1 preferred stock and
warrants to purchase an aggregate of 5,032,996 shares of
common stock at a purchase price of $1.00 per unit, for
aggregate consideration of $10.1 million, including
conversion of the $2 million in convertible promissory
notes, described above, and interest thereon. Each unit
consisted of one share of Series A-1 preferred stock and a
warrant to purchase 0.5 shares of common stock at an
exercise price of $0.001 per share. Upon completion of this
offering, these shares of preferred stock will convert into
10,065,999 shares of common stock.
In November and December 2003, we issued and sold to investors
an aggregate of 13,030,570 shares of Series A-2
preferred stock at a purchase price of $1.00 per share, for
aggregate consideration of $13.0 million. Upon completion
of this offering, these shares will convert into
13,030,570 shares of common stock.
In October and November 2004, we issued and sold $8,142,824
aggregate principal amount of convertible promissory notes and
warrants to purchase an aggregate of 814,284 shares of
common stock at an exercise price of $0.273 per share. The
convertible promissory notes, plus interest thereon, converted
into shares of our Series B preferred stock in November
2004.
126
Certain relationships and related party transactions
In November 2004, we issued and sold to investors an aggregate
of 27,482,730 shares of Series B preferred stock at a
purchase price of $1.3463 per share, for aggregate
consideration of $37.0 million including conversion of the
$8,142,824 in convertible promissory notes, described above, and
interest thereon. Upon completion of this offering, these shares
will convert into 27,482,730 shares of common stock.
Purchasers of our preferred stock, common stock warrants and
convertible promissory notes that have converted into shares of
our preferred stock included, among others, directors and
holders of more than 5% of our capital stock or entities
affiliated with them. The following table presents the number of
shares purchased by (or, in the case of convertible promissory
notes purchased, the number of shares of our preferred stock
issued upon conversion of such notes to) each of these related
parties.
Shares of preferred stock
Common stock
Name(1)
Series A-1
Series A-2
Series B
warrants
Entities related to Vivo
Ventures(2)
2,668,367
3,122,393
4,765,854
1,681,562
Entities related to Sofinnova
Ventures(3)
2,668,366
3,122,393
4,765,853
1,681,562
Entities related to Atlas
Venture(4)
2,334,789
2,732,095
4,170,097
1,468,847
BAVP, L.P.
2,333,333
2,732,095
4,168,899
1,348,069
Entities related to Pequot Capital Management,
Inc.(5)
—
—
8,170,541
—
CNF Investments,
LLC(6)
—
525,070
493,813
26,637
(1)
See “Principal stockholders” for additional
information related to beneficial ownership of our shares.
(2)
Edgar G. Engleman, M.D. is a member of our board of
directors and is a managing partner of Vivo Ventures. Includes:
1,335,034 shares of Series A-1 preferred stock and
341,225 shares of Series B preferred stock held by
BioTechnology Development Fund II, L.P.;
1,309,137 shares of Series A-1 preferred stock,
3,065,731 shares of Series A-2 preferred stock and
3,600,561 shares of Series B preferred stock held by
BioTechnology Development Fund IV, L.P.; 24,196 shares
of Series A-1 preferred stock, 56,662 shares of
Series A-2 preferred stock and 66,547 shares of
Series B preferred stock held by BioTechnology Development
Fund IV Affiliates, L.P.; and 757,521 shares of
Series B preferred stock held by BioAsia Crossover Fund,
L.P. BioTechnology Development Fund II, L.P., BioTechnology
Development Fund IV, L.P., BioTechnology Development
Fund IV Affiliates, L.P. and BioAsia Crossover Fund, L.P.
are each entities affiliated with Vivo Ventures.
(3)
James I. Healy, M.D., Ph.D. is a member of our
board of directors and is a managing director of Sofinnova
Ventures. Includes: 2,545,584 shares of Series A-1
preferred stock, 2,978,718 shares of Series A-2
preferred stock and 4,546,556 shares of Series B
preferred stock held by Sofinnova Venture Partners V, LP;
83,750 shares of Series A-1 preferred stock,
98,001 shares of Series A-2 preferred stock and
149,583 shares of Series B preferred stock held by
Sofinnova Venture Affiliates V, LP; and 39,032 shares
of Series A-1 preferred stock, 45,674 shares of
Series A-2 preferred stock and 69,714 shares of
Series B preferred stock held by Sofinnova Venture
Principals V, LP. Sofinnova Venture Partners V, LP,
Sofinnova Venture Affiliates V, LP and Sofinnova Venture
Principals V, LP are each entities affiliated with
Sofinnova Ventures.
(4)
Joël Besse is a member of our board of directors and is
a partner at Atlas Venture. Includes: 738,229 shares of
Series A-1 preferred stock, 863,851 shares of
Series A-2 preferred stock and 1,318,527 shares of
Series B preferred stock held by Atlas Venture Fund V,
L.P.; 91,699 shares of Series A-1 preferred stock,
107,303 shares of Series A-2 preferred stock and
163,782 shares of Series B preferred stock held by
Atlas Venture Parallel Fund V-A, C.V.; 91,699 shares
of Series A-1 preferred stock, 107,303 shares of
Series A-2 preferred stock and 163,782 shares of
127
Certain relationships and related party transactions
Series B preferred stock held by Atlas Venture Parallel
Fund V-B, C.V.; 12,288 shares of Series A-1
preferred stock, 14,379 shares of Series A-2 preferred
stock and 21,948 shares of Series B preferred stock
held by Atlas Venture Entrepreneurs’ Fund V, L.P.;
1,335,584 shares of Series A-1 preferred stock,
1,562,848 shares of Series A-2 preferred stock and
2,385,432 shares of Series B preferred stock held by
Atlas Venture Fund VI, L.P.; 40,835 shares of
Series A-1 preferred stock, 47,794 shares of
Series A-2 preferred stock and 72,947 shares of
Series B preferred stock held by Atlas Venture
Entrepreneurs’ Fund VI, L.P.; and 24,455 shares
of Series A-1 preferred stock, 28,617 shares of
Series A-2 preferred stock and 43,679 shares of
Series B preferred stock held by Atlas Venture Fund VI
GmbH & Co. KG. Atlas Venture Fund V, L.P., Atlas
Venture Parallel Fund V-A, C.V., Atlas Venture Parallel
Fund V-B, C.V., Atlas Venture Entrepreneurs’
Fund V, L.P., Atlas Venture Fund VI, L.P., Atlas
Venture Entrepreneurs’ Fund VI, L.P., and Atlas
Venture Fund VI GmbH & Co. KG are each entities
affiliated with Atlas Venture.
(5)
Includes: 7,161,063 shares of Series B preferred
stock held by Pequot Private Equity Fund III, L.P.; and
1,009,478 shares of Series B preferred stock held by
Pequot Offshore Private Equity Partners III, L.P. Pequot
Capital Management, Inc. is the Investment Manager for Pequot
Private Equity Fund III, L.P. and Pequot Offshore Private Equity
Partners III, L.P., and holds all voting and dispositive power
for all shares held of record by these funds. Mr. Enright
is a Managing Director of Pequot Capital Management, Inc. and a
general partner of each of these funds. Mr. Enright serves
as a member of our board of directors.
(6)
Robert J. Flanagan is a member of our board of directors and
is a manager of CNF Investments, LLC.
In each of these preferred stock financings, we entered into
various stockholder agreements with the holders of our preferred
stock relating to voting rights with respect to directors,
registration rights, information rights and rights of first
refusal, among other things.
These stockholder agreements will terminate upon the completion
of this offering, except for the following:
--
the registration rights granted
under our amended and restated registration rights agreement, as
more fully described in “Description of capital stock—
Registration rights;” and
--
the representations and warranties
made under our Series B preferred stock purchase agreement
entered into in November 2004, which survive for a period of
30 months after the date of this agreement.
OTHER RELATED PARTY TRANSACTIONS
Certain of our officers and directors are also officers,
directors and stockholders of entities affiliated with PCI.
Dr. Clarence-Smith, our chief executive officer and one of
our directors, is a director and stockholder of PCI, and
Mr. Flanagan, our corporate secretary and one of our
directors, is also a director of PCI. PCI owns all of the
outstanding capital stock of Prestwick Clinical, Inc. and
Prestwick Scientific Capital, Inc. Prestwick Scientific Capital
owns a 49% interest in Prestwick Chemical, Inc.
Dr. Clarence-Smith and Mr. Flanagan are directors of
Prestwick Clinical, Prestwick Scientific Capital and Prestwick
Chemical. We are currently a party to a services agreement with
Prestwick Chemical under which Prestwick Chemical has agreed to
provide us with certain medicinal chemistry services with
respect to our compounds. The agreement has a term of one year
and automatically renews for one-year periods unless one party
provides notice of non-renewal. We are obligated under this
services agreement to pay Prestwick Chemical an annual fee which
is equal to 430,000 Euros (approximately $550,000 based on the
exchange rate as of March 31, 2005) for 2005, subject to
increase of 5% per year in subsequent years. We believe that the
terms of this agreement are no less favorable to us than we
could obtain from an unaffiliated party.
128
Certain relationships and related party transactions
Upon commencement of our operations in December 2002, we began
using PCI’s leased office space and equipment.
Additionally, PCI paid our payroll and benefit costs as well as
certain development expenses through December 31, 2002.
Under an informal cost sharing arrangement, we reimbursed PCI
for these costs as other well as specifically identifiable
direct charges and allocated overhead, which amounted to
approximately $54,000 for the period from our inception through
December 31, 2002.
During 2003, except for leased office space rent paid by PCI, we
became the primary payor of PCI’s operating disbursements
as well as PCI’s payroll and benefit costs and certain of
PCI’s obligations for license and patent costs. Under the
same informal cost sharing arrangement, PCI agreed to reimburse
us for these costs as well as other specifically identifiable
direct charges and allocated overhead, which amounted to
approximately $202,000 for the year ended December 31,2003. PCI paid rent for office space used by us amounting to
approximately $177,000 during 2003. In addition, we made cash
reimbursement payments of PCI of approximately $90,000 in 2003.
During 2004, we continued as the primary payor of our own
operating expenses as well as certain costs of PCI, and PCI
continued paying the rent for office space. We paid
approximately $30,000 for office supplies and services for PCI.
We reimbursed PCI approximately $177,000 for rent during 2004.
In addition, we made cash reimbursement payments to PCI of
approximately $89,000 in 2004. We believe that the terms of our
arrangement with PCI are no less favorable to us than we could
obtain from an unaffiliated third party.
Pursuant to an agreement executed in April 2004, we purchased
information technology and other services from S2N Technology
Group, LLC (S2N). S2N is owned by Clark Construction, LLC.
Robert Flanagan, one of our directors, is an officer of Clark
Construction. We paid $212,173 to S2N during the year ended
December 31, 2004. We believe that the terms of our
agreement with S2N are no less favorable to us than we could
obtain from an unaffiliated third party.
We have entered into indemnification agreements with each of our
directors and executive officers, as described elsewhere in this
prospectus under “Management— Limitation of Liability
and Indemnification.”
129
Shares eligible for future sale
Prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common
stock in the public market, or the perception that such sales
could occur, could adversely affect the price of our common
stock. Furthermore, since only a limited number of shares will
be available for sale shortly after this offering because of
contractual and legal restrictions on resale described below,
sales of substantial amounts of common stock in the public
market after the restrictions lapse (180 days after the
date of this prospectus, in many cases) could adversely affect
the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of this
offering, shares
of common stock will be outstanding, assuming no exercise of the
underwriters’ over-allotment option and no exercise of
options or warrants. All of the shares sold in this offering
will be freely tradable unless held by an affiliate of ours.
Except as set forth below, the remaining shares of common stock
outstanding after this offering will be restricted as a result
of securities laws or lock-up agreements. These remaining shares
will be available for sale in the public market roughly as
follows:
--
restricted
shares will be eligible for immediate sale upon the completion
of this offering;
--
restricted
shares, plus
approximately shares
of common stock issuable upon exercise of vested stock options,
will be eligible for sale upon expiration of lock-up agreements
180 days after the date of this prospectus; and
--
the remainder of the restricted
shares will be eligible for sale from time to time thereafter
upon expiration of their respective one-year holding periods,
but could be sold earlier if the holders exercise any available
registration rights.
Rule 144
In general, under Rule 144 under the Securities Act of
1933, or the Securities Act, as in effect on the date of this
prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not
exceed the greater of:
--
1% of the total number of shares
of our common stock then outstanding, which will equal
approximately shares
immediately after this offering; or
--
the average weekly trading volume
of our common stock on the Nasdaq National Market during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us for at least
90 days. shares
of our common stock will qualify for resale under Rule 144
beginning 90 days after the date of this prospectus.
However, substantially all of these shares are subject to
lock-up agreements as described below and will become eligible
for sale at the expiration of those agreements.
Rule 144(k)
Under Rule 144(k) under the Securities Act as in effect on
the date of this prospectus, a person who is not deemed to have
been one of our affiliates (within the meaning of Rule 144)
at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at
least two years, including the holding period of any prior owner
other than an affiliate, is entitled to sell the shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of
Rule 144. shares
of our common stock will qualify for resale under
130
Shares eligible for future sale
Rule 144(k) beginning on the date of this prospectus
and shares
will qualify for resale under Rule 144(k) within
180 days of the date of this prospectus.
Rule 701
Rule 701 under the Securities Act, as in effect on the date
of this prospectus, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions
of Rule 144, including the holding period requirement. Most
of our employees, officers, directors or consultants who
purchased shares under a written compensatory plan or contract
may be entitled to rely on the resale provisions of
Rule 701, but all holders of Rule 701 shares are
required to wait until 90 days after the date of this
prospectus before selling their shares. However, substantially
all Rule 701 shares are subject to lock-up agreements
as described below and under “Underwriting” and will
become eligible for sale at the expiration of those agreements.
Lock-up agreements
Except for sales of common shares to the underwriters in
accordance with the terms of the purchase agreement, we, each of
our directors and officers, and the holders of substantially all
of our outstanding shares and options and warrants to acquire
our shares have agreed not to sell or otherwise dispose of,
directly or indirectly, any of our common shares (or any
security convertible into or exchangeable or exercisable for our
common shares) without the prior written consent of UBS
Securities LLC and Deutsche Bank Securities Inc. for a period of
180 days from the date of this prospectus. In addition, for
a period of 180 days from the date of this prospectus,
except as required by law and subject to limited exceptions, we
have agreed that our board of directors will not consent to any
offer for sale, sale or other disposition, or any transaction
which is designed or could be expected to result in the
disposition by any person, directly or indirectly, of any of our
common stock without the prior written consent of UBS Securities
LLC and Deutsche Bank Securities Inc. Notwithstanding the
foregoing, if:
--
during the beginning with the date
that is 15 calendar days plus three business days before the
last day of the 180-day period, we issue an earnings release or
material news or a material event relating to us occurs; or
--
prior to the expiration of the
180-day period, we announce that we will release earnings
results or we become aware that material news or a material
event will occur during the 16 days immediately following
the last day of the 180-day period,
the lock-up restrictions will continue to apply until the
expiration of an additional period beginning on our issuance of
the earnings release or the occurrence of the material news or
material event, as applicable, and extending for 15 calendar
days plus three business days, unless UBS Securities LLC and
Deutsche Bank Securities Inc. waive in writing, such extension.
UBS Securities LLC and Deutsche Bank Securities Inc., in their
joint discretion, at any time or from time to time and without
notice, may release for sale in the public market all or any
portion of the shares restricted by the terms of the lock-up
agreements. The lock-up restrictions will not apply to
transactions relating to common stock acquired in this offering.
The lock-up restrictions also will not apply to certain
transfers not involving a disposition for value, provided that
the recipient agrees to be bound by these lock-up restrictions
and provided that no filing by the transferor under
Rule 144 of the Securities Act or Section 16 of the
Exchange Act and no other public disclosure is required or will
be voluntarily made in connection with such transfers.
131
Shares eligible for future sale
Registration rights
As described below in “Description of capital stock—
Registration rights,” upon completion of this offering, our
preferred stockholders will be entitled to rights with respect
to the registration of their shares of common stock under the
Securities Act, subject to the 180 day lock-up arrangement
described above. Registration of these shares under the
Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except
for shares purchased by affiliates. Any sales of securities by
these stockholders could have a material adverse effect on the
trading price of our common stock.
Stock options
We intend to file with the SEC a registration statement on
Form S-8 under the Securities Act covering the shares of
common stock reserved for issuance under our 2003 Equity
Incentive Plan and 2005 Non-Employee Directors’ Stock Plan.
The registration statement is expected to be filed and become
effective as soon as practicable after the completion of this
offering. Accordingly, shares registered under the registration
statement will be available for sale in the open market, subject
to Rule 144 volume limitations applicable to affiliates,
and subject to any vesting restrictions and lock-up agreements
applicable to these shares.
132
United States federal tax considerations for
non-U.S. holders
The following is a general discussion of certain material United
States federal income and estate tax consequences of the
ownership and disposition of our common stock by a beneficial
owner thereof that is a “Non-U.S. Holder.” A
“Non-U.S. Holder” is a person or entity that, for
United States federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership
or a foreign estate or trust. The test for whether an individual
is a resident of the United States for federal estate tax
purposes differs from the test used for federal income tax
purposes. Some individuals, therefore, may be
“Non-U.S. Holders” for purposes of the federal
income tax discussion below, but not for purposes of the federal
estate tax discussion, and vice versa.
This discussion is based on the United States Internal Revenue
Code of 1986, as amended, judicial decisions and administrative
regulations and interpretations in effect as of the date of this
prospectus, all of which are subject to change, including
changes with retroactive effect. This discussion does not
address all aspects of United States federal income and estate
taxation that may be relevant to Non-U.S. Holders in light
of their particular circumstances (including, without
limitation, Non-U.S. Holders who are pass-through entities
or who hold their common stock through pass-through entities)
and does not address any tax consequences arising under the laws
of any state, local or non-U.S. jurisdiction. Prospective
holders should consult their tax advisors with respect to the
federal income and estate tax consequences of holding and
disposing of our common stock in light of their particular
situations and any consequences to them arising under the laws
of any state, local or non-U.S. jurisdiction.
Dividends
Subject to the discussion below, dividends, if any, paid to a
Non-U.S. Holder of our common stock out of our current or
accumulated earnings and profits generally will be subject to
withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. To obtain a
reduced rate of withholding under a treaty, a
Non-U.S. Holder generally will be required to provide us
with a properly-executed IRS Form W-8BEN certifying the
Non-U.S. Holder’s entitlement to benefits under that
treaty. Treasury Regulations provide special rules to determine
whether, for purposes of determining the applicability of a tax
treaty, dividends paid to a Non-U.S. Holder that is an
entity should be treated as paid to the entity or to those
holding an interest in that entity.
There will be no withholding tax on dividends paid to a
Non-U.S. Holder that are effectively connected with the
Non-U.S. Holder’s conduct of a trade or business
within the United States if a properly-executed IRS
Form W-8ECI, stating that the dividends are so connected,
is filed with us. Instead, the effectively connected dividends
will be subject to regular U.S. income tax, generally in
the same manner as if the Non-U.S. Holder were a
U.S. citizen or resident alien or a domestic corporation,
as the case may be, unless a specific treaty exemption applies.
A corporate Non-U.S. Holder receiving effectively connected
dividends may also be subject to an additional “branch
profits tax,” which is imposed, under certain
circumstances, at a rate of 30% (or such lower rate as may be
specified by an applicable treaty) of the corporate
Non-U.S. Holder’s effectively connected earnings and
profits, subject to certain adjustments.
133
United States federal tax considerations for
non-U.S. holders
Gain on disposition of common stock
A Non-U.S. Holder generally will not be subject to United
States federal income tax with respect to gain realized on a
sale or other disposition of our common stock unless
(i) the gain is effectively connected with a trade or
business of such holder in the United States and a specific
treaty exemption does not apply to eliminate the tax,
(ii) if a tax treaty would otherwise apply to eliminate the
tax, the gain is attributable to a permanent establishment of
the Non-U.S. Holder in the United States, (iii) in the
case of Non-U.S. Holders who are nonresident alien
individuals and hold our common stock as a capital asset, such
individuals are present in the United States for 183 or more
days in the taxable year of the disposition and certain other
conditions are met, (iv) the Non-U.S. Holder is
subject to tax pursuant to the provisions of the Code regarding
the taxation of U.S. expatriates, or (v) we are or
have been a “United States real property holding
corporation” within the meaning of Code
Section 897(c)(2) at any time within the shorter of the
five-year period preceding such disposition or such
holder’s holding period. We believe that we are not, and do
not anticipate becoming, a United States real property holding
corporation. Even if we are treated as a United States real
property holding corporation, gain realized by a
Non-U.S. Holder on a disposition of our common stock will
not be subject to United States federal income tax so long as
(i) the Non-U.S. Holder is considered to have
beneficially owned no more than five percent of the fair market
value of our common stock at all times within the shorter of
(a) the five year period preceding the disposition or
(b) the holder’s holding period and (ii) our
common stock is regularly traded on an established securities
market, and our common stock may not qualify as regularly traded
on an established securities market.
Information reporting requirements and backup withholding
Generally, we must report to the United States Internal Revenue
Service the amount of dividends paid, the name and address of
the recipient, and the amount, if any, of tax withheld. A
similar report is sent to the holder. Pursuant to tax treaties
or certain other agreements, the United States Internal Revenue
Service may make its reports available to tax authorities in the
recipient’s country of residence. Backup withholding
generally will not apply to payments of dividends made by us or
our paying agents to a Non-U.S. Holder if the holder has
provided its correct federal taxpayer identification number, if
any, or the required certification that it is not a United
States person (which is generally provided by furnishing a
properly-executed IRS Form W-8BEN), unless the payor
otherwise has knowledge that the payee is a U.S. person or
receives a notice of underreporting.
Under current United States federal income tax law, information
reporting and backup withholding currently imposed at a rate of
31% will apply to the proceeds of a disposition of our common
stock effected by or through a United States office of a broker
unless the disposing holder certifies as to its
non-U.S. status or otherwise establishes an exemption.
Generally, United States information reporting and backup
withholding will not apply to a payment of disposition proceeds
where the transaction is effected outside the United States
through a non-U.S. office of a non-U.S. broker.
However, United States information reporting requirements (but
not backup withholding) will apply to a payment of disposition
proceeds where the transaction is effected outside the United
States by or through an office outside the United States of a
broker that fails to maintain documentary evidence that the
holder is a Non-U.S. Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption,
and the broker is (i) a United States person, (ii) a
foreign person which derived 50% or more of its gross income for
certain periods from the conduct of a trade or business in the
United States, (iii) a “controlled foreign
corporation” for U.S. federal income tax purposes, or
(iv) a foreign partnership (a) at least 50% of the
capital or profits interest in which is owned by
U.S. persons, or (b) that is engaged in a United
States trade or business. Backup withholding will apply to a
payment of disposition proceeds if the broker has actual
knowledge that the holder is a United States person.
134
United States federal tax considerations for
non-U.S. holders
Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in
an overpayment of taxes, a refund may be obtained, provided that
the required information is furnished to the United States
Internal Revenue Service.
Federal estate tax
An individual Non-U.S. Holder who is treated as the owner
of, or has made certain lifetime transfers of, an interest in
our common stock will be required to include the value thereof
in his gross estate for United States federal estate tax
purposes, and may be subject to United States federal estate tax
unless an applicable estate tax treaty provides otherwise.
135
Description of capital stock
The following descriptions of our capital stock give effect to
the following events:
the conversion of our preferred
stock into 50,579,299 shares of common stock, which will
occur upon the completion of this offering.
GENERAL
Outstanding shares
As of March 31, 2005, 12,762,833 shares of common
stock were issued and outstanding and 50,579,299 shares of
preferred stock were issued and outstanding that will be
automatically converted into common stock. As of March 31,2005, there were outstanding options to
purchase 9,065,500 shares of common stock under the
2003 Restated Plan, outstanding warrants to
purchase 1,197,238 shares of common stock at an
exercise price of $0.001 per share and warrants to
purchase 215,217 shares of common stock at an exercise
price of $0.273 per share. All of the warrants will
terminate upon the offering unless earlier exercised. As of
March 31, 2005, we had 27 holders of our common stock, 30
holders of our preferred stock and seven holders of warrants to
purchase common stock.
Upon completion of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of
preferred stock, par value $0.001 per share.
The following is a summary of the rights of our common stock and
preferred stock. This summary is not complete. For more detailed
information, please see our amended and restated certificate of
incorporation and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
Voting rights
Each holder of common stock is entitled to one vote for each
share on all matters submitted to a vote of the stockholders,
including the election of directors. Our amended and restated
certificate of incorporation and bylaws do not provide for
cumulative voting rights. Because of this, the holders of a
majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing
for election, if they should so choose.
Dividends
Subject to preferences that may be applicable to any then
outstanding preferred stock, holders of common stock are
entitled to receive ratably those dividends, if any, as may be
declared from time to time by our board of directors out of
legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up,
holders of common stock will be entitled to share ratably in the
net assets legally available for distribution to stockholders
after the payment of all
136
Description of capital stock
of our debts and other liabilities and the satisfaction of any
liquidation preferences granted to the holders of any
outstanding shares of preferred stock.
Rights and preferences
Holders of common stock have no preemptive, conversion or
subscription rights, and there are no redemption or sinking fund
provisions applicable to the common stock. The rights,
preferences and privileges of the holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock, which we may
designate in the future.
Fully paid and nonassessable
All of our outstanding shares of common stock are, and the
shares of common stock to be issued in this offering will be,
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will
have the authority, without further action by the stockholders,
to issue up to 10,000,000 shares of preferred stock in one
or more series:
--
to establish from time to time the
number of shares to be included in each such series;
--
to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon; and
--
to increase or decrease the number
of shares of any such series (but not below the number of shares
of such series then outstanding).
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of our
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing our change in control and
may adversely affect the market price of the common stock and
the voting and other rights of the holders of common stock. We
have no current plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Demand registration rights
At any time beginning 180 days after the completion of this
offering, the holders of at least 25% of the shares of common
stock held by our stockholders who previously held preferred
stock have the right to demand that we file two registration
statements, so long as either the registration covers at least
one-third of the shares of common stock held by all of our
stockholders who were holders of our Series A-1 preferred
stock, Series A-2 preferred stock or Series B
preferred stock or the aggregate amount of securities to be sold
under each such registration statement is at least $15,000,000,
in each case subject to specified exceptions.
Form S-3 registration rights
If we are eligible to file a “short-form” registration
statement on SEC Form S-3, holders of at least 10% of the
shares of common stock held by our stockholders who previously
held preferred stock have the right to demand that we file up to
two registration statements on Form S-3 in any 12-month
period, so long as the aggregate amount of securities to be sold
under the registration statement on Form S-3 is at least
$3,000,000, subject to specified exceptions.
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Description of capital stock
“Piggyback” registration rights
If we register any securities for public sale, stockholders with
registration rights will have the right to include their shares
in the registration statement. The underwriters of any
underwritten offering will have the right to limit the number of
such shares to be included in the registration statement,
subject to certain limitations. In this offering the
underwriters have excluded any sales by existing investors.
Expenses of registration
Other than underwriting discounts and commissions, we will pay
all expenses relating to piggyback registrations and all
expenses relating to demand registrations and Form S-3
registrations so long as the aggregate amount of securities to
be sold under each such registration statement exceeds the
threshold amounts discussed above. However, we will not pay for
the expenses of any demand registration if the request is
subsequently withdrawn by the holders of a majority of the
shares having registration rights, subject to specified
exceptions.
Expiration of registration rights
The registration rights described above will expire five years
after the date of this offering.
We are subject to Section 203 of the Delaware General
Corporation Law. Section 203 generally prohibits a public
Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless
--
prior to the date of the
transaction, the board of directors of the corporation approved
either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
--
the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers and
(b) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer; or
--
on or subsequent to the date of
the transaction, the business combination is approved by the
board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative
vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines a business combination to include:
--
any merger or consolidation
involving the corporation and the interested stockholder;
--
any sale, transfer, pledge or
other disposition, involving the interested stockholder, of 10%
or more of the assets of the corporation;
--
subject to exceptions, any
transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder; or
138
Description of capital stock
--
the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the
corporation.
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with, or controlling, or controlled by, the
entity or person.
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, which will become
effective upon the completion of this offering, may delay or
discourage transactions involving an actual or potential change
in our control or change in our management, including
transactions in which stockholders might otherwise receive a
premium for their shares, or transactions that our stockholders
might otherwise deem to be in their best interests. Therefore,
these provisions could adversely affect the price of our common
stock. Among other things, our amended and restated certificate
of incorporation and bylaws:
--
permit our board of directors to
issue up to 10,000,000 shares of preferred stock, with any
rights, preferences and privileges as they may designate
(including the right to approve an acquisition or other change
in control);
--
provide that the authorized number
of directors may be changed only by resolution of the board of
directors;
--
provide that all vacancies,
including newly created directorships, may, except as otherwise
required by law, be filled by the affirmative vote of a majority
of directors then in office, even if less than a quorum;
--
divide our board of directors into
three classes;
--
require that any action to be
taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be taken
by written consent;
--
provide that stockholders seeking
to present proposals before a meeting of stockholders or to
nominate candidates for election as directors at a meeting of
stockholders must provide timely notice in writing, and also
must comply with specified requirements as to the form and
content of a stockholder’s notice;
--
do not provide for cumulative
voting rights (therefore allowing the holders of a majority of
the shares of common stock entitled to vote in any election of
directors to elect all of the directors standing for election,
if they should so choose); and
--
provide that special meetings of
our stockholders may be called only by the chairman of the
board, our chief executive officer, or by the board of directors
pursuant to a resolution adopted by a majority of the total
number of authorized directors.
The amendment of any of these provisions would require approval
by the holders of at least two-thirds of our then outstanding
common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock
is .
The transfer agent and registrar’s address
is .
139
Underwriting
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC, Deutsche Bank Securities Inc. and CIBC World Markets Corp.
are the representatives of the underwriters. UBS Securities LLC
and Deutsche Bank Securities Inc. are the joint book-running
managers of this offering. We have entered into an underwriting
agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, each of the
underwriters has severally agreed to purchase the number of
shares of common stock listed next to its name in the following
table:
Number of
Underwriters
shares
UBS Securities LLC
Deutsche Bank Securities Inc.
CIBC World Markets Corp.
Total
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters’ over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
--
receipt and acceptance of our
common stock by the underwriters; and
--
the underwriters’ right to
reject orders in whole or in part.
We have been advised by the representatives that the
underwriters intend to make a market in our common stock but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option to buy up to an
aggregate
of additional
shares of our common stock. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with this offering. The underwriters
have 30 days from the date of this prospectus to exercise
this option. If the underwriters exercise this option, they will
each purchase additional shares approximately in proportion to
the amounts specified in the table above.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the initial offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per
share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to
$ per
share from the initial public offering price. Sales of shares
made outside of the United States may be made by affiliates of
the underwriters. If all the shares are not sold at the initial
public offering price, the representatives may change the
offering price and the other selling
140
Underwriting
terms. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the shares at the
prices and upon the terms stated therein and, as a result, will
thereafter bear any risk associated with changing the offering
price to the public or other selling terms. The representatives
of underwriters have informed us that they do not expect to sell
to accounts over which such representatives exercise
discretionary authority more than an aggregate of 5% of the
shares of common stock to be offered.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters’ option to purchase up to an
additional shares:
No exercise
Full exercise
Per share
$
$
Total
$
$
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately $1.5 million.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and substantially all
of our existing security holders have entered into lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC
and Deutsche Bank Securities Inc., offer, sell, contact to sell
or otherwise dispose of, directly or indirectly, or hedge our
common stock or securities convertible into or exchangeable or
exercisable for our common stock. These restrictions will be in
effect for a period of 180 days after the date of this
prospectus. At any time and without public notice, UBS
Securities LLC and Deutsche Bank Securities Inc. may, in their
joint discretion, release some or all of the securities from
these lock-up agreements.
The lock-up period may be extended for up to 37 additional days
under certain circumstances where we announce or pre-announce
earnings or material news or a material event within
approximately 18 days prior to, or approximately
16 days after, the termination of the lock-up period. Even
under those circumstances, however, the lock-up period will not
extend if our common stock is actively traded, meaning that our
common stock has a public float of at least $150 million
and an average trading volume of at least $1 million per
day.
INDEMNIFICATION AND CONTRIBUTION
We have agreed to indemnify the underwriters and their
controlling persons against certain liabilities, including
certain liabilities under the Securities Act. If we are unable
to provide this indemnification, we have agreed to contribute to
payments the underwriters and their controlling persons may be
required to make in respect of those liabilities.
NASDAQ NATIONAL MARKET QUOTATION
We will apply to have our common stock approved for quotation on
The Nasdaq National Market under the trading symbol
“PWCK”.
141
Underwriting
PRICE STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
--
stabilizing transactions;
--
short sales;
--
purchases to cover positions
created by short sales;
--
imposition of penalty
bids; and
--
syndicate covering transactions.
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering, and purchasing shares of common
stock in the open market to cover positions created by short
sales. Short sales may be “covered short sales,” which
are short positions in an amount not greater than the
underwriters’ over-allotment option referred to above, or
may be “naked short sales,” which are short positions
in excess of that amount.
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market compared to the price at which they may purchase shares
through the over-allotment option.
Naked short sales are in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market that could adversely affect investors who
purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on The Nasdaq National Market,
in the over-the-counter market or otherwise.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there was no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
--
the information set forth in this
prospectus and otherwise available to the representatives;
--
our history and prospects and the
history of and prospects for the industry in which we compete;
--
our past and present financial
performance and an assessment of our management;
--
our prospects for future earnings
and the present state of our development;
142
Underwriting
--
the general condition of the
securities markets at the time of this offering;
--
the recent market prices of, and
the demand for, publicly traded common stock of generally
comparable companies; and
--
other factors deemed relevant by
the underwriters and us.
DIRECTED SHARE PROGRAM
At our request, certain of the underwriters have reserved up to
5% of the common stock being offered by this prospectus for sale
at the initial offering price to our officers, directors,
employees and consultants and other persons having a
relationship with us, as designated by us. The sales will be
made
by ,
through a directed share program. We do not know whether these
persons will choose to purchase all or any portion of these
reserved shares, but any purchases they do make will reduce the
number of shares available to the general public. Any directed
share participants purchasing these reserved shares will be
subject to the lock-up restrictions described in “—No
sales of similar securities” above.
AFFILIATIONS
Certain of the underwriters and their affiliates have in the
past provided and may from time to time provide certain
commercial banking, financial advisory, investment banking and
other services for us for which they were and will be entitled
to receive separate fees.
The underwriters and their affiliates may from time to time in
the future engage in transactions with us and perform services
for us in the ordinary course of their business.
143
Legal matters
The validity of the common stock we are offering will be passed
upon for us by Cooley Godward LLP, Reston, Virginia. As of the
date of this prospectus, GC&H Investments, LLC, an
investment partnership composed of certain partners of and
persons associated with Cooley Godward LLP, owns
102,278 shares of our preferred stock, which will convert
into 102,278 shares of our common stock upon the closing of this
offering, and warrants to purchase up to 15,286 shares of
our common stock. Morrison & Foerster LLP, New York,
New York, is counsel for the underwriters in connection with
this offering.
Experts
Ernst & Young LLP, independent registered public
accounting firm, have audited our consolidated financial
statements at December 31, 2003 and 2004 and for the period
November 1, 2002 (inception) through December 31,2002 and for the years ended December 31, 2003 and 2004,
and the Statement of direct operating expenses relating to
certain assets of Prestwick Scientific Capital, Inc. for the
period January 1, 2002 through October 31, 2002, as
set forth in their reports. We have included our consolidated
financial statements and the Statement of direct operating
expenses relating to certain assets of Prestwick Scientific
Capital, Inc. in the prospectus and elsewhere in the
registration statement in reliance upon Ernst & Young
LLP’s report, given on their authority as experts in
accounting and auditing.
Where you can find more information
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act of 1933, as amended, with
respect to the shares of common stock being offered by this
prospectus. This prospectus does not contain all of the
information in the registration statement and its exhibits. For
further information with respect to Prestwick Pharmaceuticals
and the common stock offered by this prospectus, we refer you to
the registration statement and its exhibits. Statements
contained in this prospectus as to the contents of any contract
or any other document referred to are not necessarily complete
and, in each instance, we refer you to the copy of the contract
or other document filed as an exhibit to the registration
statement. Each of these statements is qualified in all respects
by this reference.
You can read our SEC filings, including the registration
statement of which this prospectus is a part, over the Internet
at the SEC’s website at www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference
facilities at 450 Fifth Street, N.W., Washington, D.C.
20549. You may also obtain copies of the document at prescribed
rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934, as amended, and we will file reports, proxy
statements and other information with the SEC. We also intend to
furnish our stockholders with annual reports containing our
financial statements audited by an independent public accounting
firm and quarterly reports containing our unaudited financial
information. We maintain a website at www.prestwickpharma.com.
Upon completion of this offering, you may access our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act with the SEC free of charge at our
website, www.prestwickpharma.com, as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC. The reference to our web address does not
constitute incorporation by reference of the information
contained at, or accessible through, this site.
144
Prestwick Pharmaceuticals, Inc. and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm
Statement of direct operating expenses related to certain assets
(Prestwick Scientific Capital, Inc.) and Consolidated statements
of operations (Prestwick Pharmaceuticals, Inc.)
F-5
Consolidated statements of stockholders’ equity (deficit)
F-6
Consolidated statements of cash flows
F-7
Notes to the consolidated financial statements
F-9
F-1
Prestwick Pharmaceuticals, Inc. and Subsidiary
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Prestwick Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of
Prestwick Pharmaceuticals, Inc. and subsidiary (the
“Company”) as of December 31, 2003 and 2004, and
the related consolidated statements of operations,
stockholders’ equity (deficit), and cash flows for the
period November 1, 2002 (inception) through
December 31, 2002 and for the years ended December 31,2003 and 2004. These financial statements are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2003 and
2004 and the consolidated results of their operations and cash
flows for the period November 1, 2002 (inception) through
December 31, 2002 and for the years ended December 31,2003 and 2004 in conformity with U.S. generally accepted
accounting principles.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Prestwick Pharmaceuticals, Inc.
We have audited the accompanying Statement of Direct Operating
Expenses Related to Certain Assets of Prestwick Scientific
Capital, Inc. for the period January 1, 2002 through
October 31, 2002. This Statement of Direct Operating
Expenses is the responsibility of the management of Prestwick
Pharmaceuticals, Inc. (the “Company”). Our
responsibility is to express an opinion on the Statement of
Direct Operating Expenses based on our audit.
We conducted our audit in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statement of
Direct Operating Expenses is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Statement of Direct Operating
Expenses. An audit includes assessing the basis of accounting
used and significant estimates made by management, as well as
evaluating the overall presentation of the Statement of Direct
Operating Expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Statement of Direct Operating Expenses was
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for
inclusion in the registration statement on Form S-1 of
Prestwick Pharmaceuticals, Inc. as described in Note 1, and
is not intended to be a complete presentation of the
Company’s revenues and expenses.
In our opinion, the Statement of Direct Operating Expenses
referred to above presents fairly, in all material respects, the
direct operating expenses related to certain assets of Prestwick
Scientific Capital, Inc. for the period January 1, 2002
through October 31, 2002, as described in Note 1, in
conformity with U.S. generally accepted accounting principles.
Current portion of capital lease obligations and other financed
obligations
5,295
21,653
Total current liabilities
2,887,929
2,395,757
Capital lease obligations, less current portion
21,033
15,299
Total liabilities
2,908,962
2,411,056
Commitments and contingences
Redeemable convertible preferred stock:
Series A-1 preferred stock; $0.001 par value;
10,065,999 shares authorized, issued and outstanding as of
December 31, 2003 and 2004; liquidation preference of
$11,550,803 at December 31, 2004
10,577,593
8,246,512
$
—
Series A-2 preferred stock; $0.001 par value;
13,030,570 shares authorized, issued and outstanding as of
December 31, 2003 and 2004; liquidation preference of
$14,178,689 at December 31, 2004
13,117,909
14,164,097
—
Series B preferred stock; $0.001 par value;
27,482,730 shares authorized, issued and outstanding as of
December 31, 2004; liquidation preference of $37,251,396 at
December 31, 2004
—
37,164,052
—
Total redeemable convertible preferred stock
23,695,502
59,574,661
—
Stockholders’ equity (deficit):
Common stock, $0.001 par value; 48,000,000 and
80,000,000 shares authorized as of December 31, 2003
and 2004 respectively; 7,250,000 and 11,861,680 shares
issued and outstanding as of December 31, 2003 and 2004,
respectively, and 62,440,979 shares issued and outstanding
on a pro forma basis
7,250
11,862
62,441
Additional paid-in capital
814,413
3,033,784
62,557,866
Note receivable from officer
(46,965
)
(48,878
)
(48,878
)
Other comprehensive loss
—
(4,465
)
(4,465
)
Accumulated deficit
(12,086,518
)
(32,127,984
)
(32,127,984
)
Total stockholders’ equity (deficit)
(11,311,820
)
(29,135,681
)
$
30,438,980
Total liabilities and stockholders’ equity (deficit)
$
15,292,644
$
32,850,036
See notes to consolidated financial statements.
F-4
Prestwick Pharmaceuticals, Inc. and Subsidiary
STATEMENT OF DIRECT OPERATING EXPENSES RELATED TO CERTAIN
ASSETS (PRESTWICK SCIENTIFIC CAPITAL, INC.) AND CONSOLIDATED
STATEMENTS OF OPERATIONS (PRESTWICK PHARMACEUTICALS, INC.)
Research and development (including stock-based compensation
expense of $82,621 and $31,681 for the years ended
December 31, 2003 and 2004, respectively)
379,784
247,186
6,971,036
11,678,777
Acquired in-process research and development
—
1,060,975
—
—
Sales and marketing (including stock-based compensation expense
of $724 and $12,972 for the years ended December 31, 2003
and 2004, respectively)
—
8,101
1,196,676
2,617,754
General and administrative (including stock-based compensation
expense of $122,959 and $317,895 for the years ended
December 31, 2003 and 2004, respectively)
47,879
213,371
2,379,505
4,402,437
Total operating expenses
427,663
1,529,633
10,547,217
19,240,409
Loss from operations
(427,663
)
(1,529,633
)
(10,547,217
)
(18,710,510
)
Other income (expense):
Foreign currency transaction loss
—
—
—
(56,158
)
Interest income
—
677
52,780
130,391
Interest expense
—
(14,104
)
(49,021
)
(1,405,189
)
Net loss
$
(427,663
)
(1,543,060
)
(10,543,458
)
(20,041,466
)
Accretion of redeemable convertible preferred stock to
redemptive value
—
(816,189
)
(2,310,930
)
Net loss attributable to common stockholders
$
(1,543,060
)
$
(11,359,647
)
$
(22,352,396
)
Net loss per common share, basic and diluted:
Historical
$
(4.63
)
$
(1.57
)
$
(2.81
)
Pro forma (unaudited)
$
—
$
—
$
(0.60
)
Shares used to compute basic and diluted net loss per common
share:
Historical
333,562
7,250,000
7,958,668
Pro forma (unaudited)
—
—
33,345,465
See notes to consolidated financial statements.
F-5
Prestwick Pharmaceuticals, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
Prestwick Pharmaceuticals, Inc. (the “Company”) is a
product-focused specialty pharmaceutical company engaged in the
development and commercialization of small molecule drugs with
high commercial potential and relatively low development risk
that target chronic diseases of the central nervous system, or
CNS. The Company’s strategy is to identify, acquire,
develop and commercialize product candidates that address CNS
disorders with significant unmet medical need. The Company also
intends to develop and market both new and enhanced delivery
forms and additional therapeutic applications of some of its
product candidates to increase their commercial potential. To
date, the Company has in-licensed rights relating to five
product candidates, one of which, tetrabenazine, the Company
currently markets in Canada and expects to receive approval to
market in the United States.
The Company was incorporated in Delaware on November 1,2002 and began operations in December 2002 as KCS
Pharmaceuticals, Inc. (“KCS”) after executing an Asset
Purchase and Subscription Agreement (the “Asset Purchase
Agreement”) with Prestwick Scientific Capital, Inc.
(“Prestwick Scientific”), and its parent company,
Prestwick Companies, Inc. (“PCI”). Pursuant to the
Asset Purchase Agreement, the Company acquired rights, title and
interest in product candidates used to treat disorders of the
CNS and previously held by Prestwick Scientific. On
January 10, 2003, the name of KCS was changed to Prestwick
Pharmaceuticals, Inc.
The Statement of Direct Operating Expenses related to Prestwick
Scientific for the pre-asset acquisition period from
January 1, 2002 through October 31, 2002 presents the
expenses directly attributable to product candidates to treat
disorders of the CNS, acquired by the Company. The expenses were
accumulated based on a specific identification review of
expenses incurred by PCI and its subsidiary, Prestwick
Scientific. The accumulation of expenses directly attributable
to the product candidates is believed to be reasonable. However,
they do not purport to show the results of operations of
Prestwick Scientific had these acquired assets operated as a
stand-alone business.
The Board of Directors has authorized the Company to file a
Registration Statement on Form S-1 with the Securities and
Exchange Commission (“SEC”) permitting the Company to
sell shares of common stock in an initial public offering
(“IPO”). If the IPO is consummated as presently
anticipated, all shares of the Company’s Series A-1,
Series A-2 and Series B redeemable convertible
preferred stock (collectively, “Preferred Stock”) will
automatically convert into shares of common stock at a ratio of
one common share per preferred share.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Prestwick
Pharmaceuticals Canada, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company consolidates its subsidiary as it has a controlling
financial interest as defined by Accounting Research Bulletin
(“ARB”) No. 51, Consolidated Financial
Statements, as amended by Statement of Financial Accounting
Standards (“SFAS”) No. 94, Consolidation of
all Majority-Owned Subsidiaries. The usual condition for
controlling financial interest is ownership of a majority of the
voting interest and, therefore, as a general rule ownership,
directly or indirectly, of more than 50% of the outstanding
voting shares is a condition indicating consolidation.
F-9
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents generally consist of money market
accounts with commercial banks. The Company considers all highly
liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Concentrations and risks
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash and
cash equivalents and accounts receivable. The Company maintains
its cash balances with credit-worthy financial institutions in
the United States, and the balances may exceed, at times, the
amount insured by the Federal Deposit Insurance Corporation.
Nitoman, the brand name of tetrabenazine in Canada, is sold
primarily to distributors and, to a limited extent, to hospitals
and retail pharmacies. Ongoing credit evaluations of customers
are performed and collateral is generally not required. The
Company maintains a reserve for potential credit losses based on
the financial condition of customers and the aging of accounts.
Generally, the Company considers receivables 90 days past
the invoice date as past due. The Company established an
allowance for bad debts of $8,863 as of December 31, 2004.
For the year ended December 31, 2004, the Company had two
customers that accounted for 50% and 15% of net revenues and 54%
and 13% of accounts receivable at December 31, 2004,
respectively.
The Company is subject to risks common to companies in the
pharmaceutical industry including, but not limited to,
uncertainties related to regulatory approvals, dependence on key
products, dependence on key customers and suppliers,
successfully manufacturing and marketing of approved products
and protection of proprietary rights.
Specifically, the Company is dependent on Cambridge Laboratories
Limited (“Cambridge”) for Nitoman. The loss of this
sole supplier may have a material adverse effect on the
Company’s ability to continue selling Nitoman in Canada and
the Company’s ability to continue its tetrabenazine
clinical trial in the United States.
Fair value of financial instruments
Financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses. The
carrying values of these instruments approximate fair value due
to their short-term nature. The fair value of the Preferred
Stock is not practicable to determine as no quoted market price
exists nor have there been any recent transactions of the
Preferred Stock. The Preferred Stock will be converted into the
common stock upon consummation of the contemplated IPO.
F-10
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Inventory consists of the finished Nitoman drug product. Nitoman
is warehoused in Canada and is sold exclusively by the Company
to the Canadian market. Title to the inventory transfers to the
Company upon payment. The Company holds title to all inventory
as of December 31, 2004. Inventory is stated at the lower
of cost or market, as determined under the first-in, first-out
method. The Company periodically reviews its inventory, and
items considered outdated or obsolete are reduced to their
estimated net realizable value.
Property and equipment
Property and equipment are recorded at cost. Assets held under
capital leases are stated at the present value of future minimum
lease payments and are amortized over the shorter of the lease
term or estimated useful life. Repairs and maintenance are
charged to operations as incurred, and significant expenditures
for additions and improvements are capitalized. Depreciation and
amortization of property and equipment, including amortization
of the capital leased asset, are calculated using the
straight-line method based on the following estimated useful
lives:
Furniture and fixtures
3 years
Equipment
3 years
Leasehold improvements
Shorter of lease term or useful life
Long-lived assets
The Company evaluates the recoverability of its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of any
asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
future discounted cash flows compared to the carrying amount of
the asset.
Redeemable convertible preferred stock
The Company uses the effective interest method to accrete the
differences between the carrying value and the estimated
redemptive value of its Preferred Stock, such that the carrying
value will approximate the redemptive amount on the earliest
possible redemption date.
Revenue recognition
The Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition,
whereby revenue is not recognized until it is realized or
realizable and earned. Revenue is recognized when all of the
following criteria are met: the product has been delivered to
the customer, the price is fixed and determinable,
collectibility is reasonably assured and persuasive evidence of
an arrangement exists. For sales of Nitoman in Canada, revenues
are recognized upon receipt of the product by the customer, as
the terms of the sale require that title pass to the customer
upon receipt of the product, assuming other criteria have been
met. The Company’s ability to transfer title of the product
may be affected by the Company’s ability to obtain title to
the product, which only occurs upon payment of the inventory to
the third party supplier.
F-11
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Revenues are reported net of allowances for chargebacks from
distributors, product returns, rebates, and early pay discounts.
Significant judgment is required to determine such allowances.
This determination is based on historical data, industry
information, and information from customers. If actual results
differ from the estimates, the Company adjusts the allowances at
the time such differences become known.
Shipping and handling cost of inventory
The shipping of inventory to customers and a per unit handling
fee are included in cost of revenues.
Foreign currency translation
The functional currency for the Company’s Canadian
operation is the Canadian dollar. Assets and liabilities of the
Company’s foreign subsidiary are translated at the exchange
rate as of the balance sheet dates. Revenues and expenses are
translated at average exchange rates prevailing during the year.
Translation adjustments resulting from this process are included
in other comprehensive loss. Gains and losses on foreign
currency transactions are included in other (income) expense.
Research and development expenses
Research and development costs are expensed as incurred.
Research and development expenses include contractor fees,
principally related to contract research organizations
(“CROs”) assisting the Company with its clinical
trials, as well as other consultants who are experts in the CNS
disorder field, legal expenses related to the Company’s
patents, patent applications and licensing and other
collaborative agreements, milestone payments to licensors for
product candidates in development, and salaries and related
personnel costs of employees engaged in product development.
The Company’s preclinical studies and all of its clinical
trials are performed by CROs. The CROs generally bill quarterly
or semiannually for services performed. The Company reviews the
activities performed under the significant contracts quarterly.
For preclinical studies, the significant factors used in
estimating accruals include the percentage of work completed to
date. For human clinical trials, the significant factors used in
estimating accruals include the number of patients enrolled and
percentage of work completed to date.
Acquired in-process research and development expenses
Acquired in-process research and development relates to acquired
product candidates and intellectual property for unapproved
products. The nature of the remaining efforts for completion of
research and development activities surrounding acquired product
candidates generally include initiation and completion of
clinical trials, completion of manufacturing validation, and
obtaining marketing approval from the FDA and other foreign
regulatory bodies, the cost, length and success of which are
extremely difficult to predict with any certainty. Products
under development may never be successfully commercialized due
to the uncertainties and risks associated with new
pharmaceuticals, changes in the reimbursement environment,
completion of clinical trials and approval by the FDA, and the
introduction of new competitive products. Accordingly, the
Company records acquired product candidates and intellectual
property for unapproved products as acquired in-process research
and development.
F-12
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Comprehensive loss includes all changes in equity for cumulative
translation adjustments resulting from the consolidation of the
Company’s Canadian subsidiary.
Segments
The Company operates in one business segment, sale of products
to treat disorders of the CNS. A single management team that
reports to the chief operating decision maker comprehensively
manages the entire business. The Company does not operate any
material separate lines of business or separate business
entities with respect to its products or product development.
Accordingly, the Company does not accumulate discrete financial
information with respect to separate product lines and does not
have separately reportable segments as defined by
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information.
Stock-based compensation
The Company accounts for stock-based compensation in accordance
with SFAS No. 123R, Share-Based Payment,
(“SFAS 123R”) issued in December 2004 by the
Financial Accounting Standards Board. SFAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the consolidated
statements of operations based on their fair values determined
using a valuation model permitted under SFAS 123R. The
Company has adopted SFAS 123R for all periods presented.
The Company accounts for equity instruments issued to
non-employees in accordance with SFAS 123R and Emerging
Issues Task Force (“EITF”) Issue No. 96-18,
Accounting for Equity Instruments that are Issued to other
Than Employees for Acquiring or in Conjunction with Selling
Goods or Services (“EITF 96-18”). The
estimated fair value of the equity instruments is recorded on
the earlier of the performance commitment date or the date the
required services are completed. The measurement of stock-based
compensation is subject to periodic adjustment as the underlying
equity instruments vest.
Income taxes
The Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to affect taxable income. A valuation allowance is
recorded if, based on the evidence available, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
Basic and diluted net loss per common share
Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted-average
number of common shares outstanding during the period, exclusive
of shares of common stock subject to repurchase. Diluted net
loss per common share reflects the potential dilution that could
occur if securities exercisable for or convertible into common
stock were exercised or converted into common stock. Mandatorily
redeemable convertible Preferred Stock, stock options and
warrants were not considered in the computation of diluted net
loss per common share for all periods presented as their effect
is anti-dilutive.
F-13
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Weighted-average number of common shares outstanding
333,562
7,260,993
8,077,559
Less weighted-average number of common shares subject to
repurchase
—
(10,993
)
(118,891
)
Weighted-average number of common shares
333,562
7,250,000
7,958,668
Net loss per common share:
Basic and diluted
$
(4.63
)
$
(1.57
)
$
(2.81
)
The following securities exercisable for or convertible into
common stock were excluded from the computation of diluted net
loss per common share for the periods presented because their
effect is anti-dilutive.
Immediately prior to the effective date of the contemplated IPO,
all outstanding shares of Preferred Stock will convert into an
aggregate of 50,579,299 shares of common stock. The pro
forma net loss per common share is included on the consolidated
statements of operations for the year ended December 31,2004 to show the effects of Preferred Stock conversion on net
loss per common share. Pro forma net loss per common share is
computed by dividing net loss, before accretion of Preferred
Stock, by the weighted average number of common shares
outstanding, including the pro forma effects of conversion of
all outstanding Preferred Stock into shares of the
Company’s common stock, as if it occurred on
January 1, 2004 or the date of issuance, whichever is later.
F-14
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Weighted-average number of common shares outstanding
8,077,559
Less weighted-average number of common shares subject to
repurchase
(118,891
)
Add preferred shares outstanding as of the later of
January 1, 2004 or date of issuance
25,386,797
Pro forma weighted-average number of common shares
33,345,465
Pro forma net loss per common share, basic and diluted
$
(0.60
)
3.
ASSET PURCHASE AND SUBSCRIPTION AGREEMENT
On December 13, 2002, the Company executed the Asset
Purchase Agreement with Prestwick Scientific and PCI. Pursuant
to the Asset Purchase Agreement, the Company acquired rights,
title and interest in product candidates used to treat disorders
of the CNS. The Company was assigned all of the rights and
obligations under two license agreements, an agreement with
Cambridge and two foreign patent applications, as well as
trademarks associated with such products and product candidates.
The Company also acquired certain office equipment from
Prestwick Scientific.
The consideration under the terms of the Asset Purchase
Agreement included 6,000,000 shares of the Company’s
common stock valued at $0.19 per share. The valuation of
the Company’s common stock was determined by an independent
appraisal. The aggregate value of the consideration of
$1,140,000 was allocated as follows: $79,025 to property and
equipment and $1,060,975 to acquired in-process research and
development expenses. At that date, the Company was several
years away from having an approved product to market, and
therefore, the Company expensed the acquired in-process research
and development.
4.
PRODUCT CANDIDATE AGREEMENTS
Pursuant to the Asset Purchase Agreement, the Company assumed
three agreements:
License Agreement with Massachusetts General Hospital dated
October 6, 2000 for a drug to treat schizophrenia (the
“MGH License”);
License Agreement with Dr. Gittos dated June 30, 2001
for a drug to treat sleep apnea (the “Gittos
License”); and
Amended and Restated Agreement with Cambridge Laboratories
Limited dated September 26, 2002 for a drug to treat chorea
associated with Huntington’s disease (the “Cambridge
Agreement”).
F-15
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
Since inception, the Company has negotiated and signed the
following agreements for additional product candidates:
Development and Commercialization License and Clinical Supply
Agreement with Neurobiotec GmbH (“NeuroBiotec”) dated
September 11, 2003 and Agreement with Schering AG and
NeuroBiotec dated September 10, 2003 for the subcutaneous
(“Pump”) and transdermal (“Patch”) delivery
of a drug to treat Parkinson’s disease (collectively, the
“NeuroBiotec Agreement”);
License agreement with Daniel C. Javitt and Glytech, Inc. dated
September 7, 2004 for a drug called D-Serine for the
treatment of schizophrenia (the “Glytech
License”); and
Agreement for Canadian Rights to Nitoman with Cambridge
Laboratories Ltd. dated April 26, 2004 for a drug to treat
chorea associated with Huntington’s disease in Canada (the
“Cambridge Canadian Agreement”).
Under all of these agreements, the Company and Prestwick
Scientific have paid and expensed an aggregate of $2,170,000 in
milestone payments as of December 31, 2004. The Company is
required to make future milestone payments of up to $14,775,000
in connection with clinical trial progress, regulatory filings
and approvals.
The MGH License
The MGH License provides the Company with exclusive worldwide
development and commercialization rights for a drug to treat
schizophrenia. The Company is responsible for paying the costs
incurred in the preparation, filing, prosecution and maintenance
of patents and patent applications. Upon commercialization of
the drug, the Company is obligated to pay certain royalties to
the licensor. The Company is also committed to pay a royalty for
any amounts received from a sublicense agreement. The MGH
License terminates in accordance with the agreement, which
includes on a country-by-country basis as patents expire or if
the Company fails to perform its patent or development
obligations.
The Gittos License
The Gittos License provides the Company with worldwide
development and commercialization rights for a drug to treat
sleep apnea. The Company is responsible for paying the costs
incurred in the preparation, filing, prosecution and maintenance
of patents and patent applications. Upon commercialization of
the drug, the Company is obligated to pay certain royalties to
the licensor. The Company is also committed to pay a royalty for
any amounts received from a sublicense agreement. The Gittos
License terminates in accordance with the agreement, which
includes on a country-by-country basis as patents expire (2011
if patents are not obtainable) or if the Company fails to
perform its patent or development obligations.
The Cambridge Agreement
The Cambridge Agreement, as amended, provides the Company
exclusive commercialization rights of a drug to treat chorea
associated with Huntington’s disease in the United States.
Except for certain tests currently in process that will be paid
for by Cambridge, the Company is responsible for all expenses,
including clinical trial costs, necessary to obtain FDA approval
to sell the drug in the United States. Upon commercialization of
the drug, the Company is obligated to pay certain royalties,
which include the cost of manufacturing the drug. The Cambridge
Agreement terminates in accordance with the
F-16
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
agreement, which includes 15 years after the last approval
for commercialization, or if the Company fails to perform its
obligations under the agreement.
Cambridge retained exclusive rights to provide the drug to the
Company for resale in the United States. The Company must
annually meet certain minimum order and sales quantities. Any
shortages are added to the subsequent year’s requirement.
If the Company fails to meet the minimum order and sales
quantity for two consecutive years, then Cambridge can terminate
the agreement.
The NeuroBiotec Agreement
The NeuroBiotec Agreement provides the Company development and
commercialization rights for a drug to treat Parkinson’s
disease in the United States and Canada. Upon Pump and Patch
commercialization, the Company is obligated to pay certain
royalties. Under the NeuroBiotec Agreement, the obligation to
pay royalties on net sales of a licensed product continues for a
period that runs, on a product-by-product basis, for at least
ten years from first commercial sale of the product and
terminates generally upon the earlier of fifteen years after
that first commercial sale of the product, the expiration of the
exclusivity under the licensed patents, and the expiration of
any exclusive marketing rights obtained in a country of sale for
such product. The NeuroBiotec Agreement terminates upon the
later of 15 years after the first commercial sale in the
United States, the expiration of exclusivity provided by a
licensed patent, or any exclusive marketing rights obtained
where the product is sold, unless otherwise earlier terminated
as provided in the agreement. Company fails to perform its
obligations under the agreement.
The Glytech License
The Glytech License provides the Company with an exclusive
worldwide license, title and interest in certain technology used
in the development of a certain product. The drug product treats
schizophrenia. Upon commercialization of the drug, the Company
will pay certain royalties to the licensor. The Glytech License
terminates in accordance with the agreement, which includes the
later of (1) the termination of the patents or (2) ten
years after the date of the first commercial sale.
The Cambridge Canadian agreement
The Cambridge Canadian Agreement provides the Company exclusive
commercialization rights of Nitoman, a drug to treat chorea
associated with Huntington’s disease in Canada. The drug
has been approved for sale by the Canadian regulatory authority.
The Company is obligated to pay a pre-specified price per unit
for a specified threshold of units and, for quantities in excess
of this threshold, the Company is charged the greater of 50% of
a pre-specified price or 50% of net sales, each determined on a
per unit basis. After the initial year, the threshold reduces
for the second and subsequent years. The Canadian Cambridge
Agreement terminates in accordance with the agreement, which
includes ten years after the Company is authorized to sell the
product, or if the Company fails to perform its obligations
under the contract.
Cambridge retains exclusive rights to be the Company’s
supplier of Nitoman. Due to the length of time to manufacture
the drug, the Company has committed to annual minimum order and
sales quantities for the first five years of the contract. As of
December 31, 2004, based on the then current Canadian
foreign exchange rate, the Company is committed to buy
approximately $5.3 million of the drug from Cambridge over
the next five years. As of December 31, 2004, the Company
has met its minimum order quantity for the first year, which
began on April 26, 2004. Any shortages below the
F-17
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
minimum order or sales quantity are added to the subsequent
year’s requirement. If the Company fails to meet the
minimum order or sales quantity of Nitoman for two consecutive
years, then Cambridge can terminate the agreement.
Additionally, the Company is required to dedicate four full-time
employees to sales of Nitoman in Canada as well as to provide
sales support from other employees in the United States. The
agreement estimates that the Company will spend at least
$300,000 per year for the first five years of the Cambridge
Canadian Agreement.
On December 13, 2002, the Company issued Convertible
Promissory Notes (the “2002 Notes”) in an aggregate
amount of $2,000,000 to new investors. The 2002 Notes were to be
converted to shares of the Company’s Series A-1
redeemable convertible Preferred Stock (“Series A-1
Preferred Stock”) within 90 days from the issuance
date. The interest rate on the 2002 Notes was 1.25%, compounded
annually. The holders of the 2002 Notes received warrants to
purchase 400,000 shares of the Company’s common
stock at an exercise price of $1.00 per share. The
estimated fair value of the warrants of $48,760 and legal fees
of $5,108 were accounted for as deferred debt issuance costs of
$53,868 and amortized to interest expense over the period the
2002 Notes were outstanding. The estimated fair value of the
warrants was calculated using a Black-Scholes valuation model
with the
F-18
Prestwick Pharmaceuticals, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(CONTINUED)
following assumptions: 7 year expected term, 0% dividend,
4.03% risk-free interest rate and 80% volatility.
On February 26, 2003, the outstanding principal and unpaid
interest on the 2002 Notes of $2,004,861 converted to
2,004,861 shares of Series A-1 Preferred Stock based
on a $1.00 per share conversion price.
